When stocks decline, and it looks like more and more stocks go on sale, where to use one’s funds?
Supposing one has decided to take advantage of the then lower prices, and thus buy, the question arises: how much to spend on which shares?
Since my assets are not unlimited, I must be judicious when buying. I cannot buy everything. In fact, there are sometimes too many opportunities. So much so I could likely not buy even a little of everything. So where to spend my stock-buying funds?
It is the corollary of the maxim “The market can stay irrational longer than you can stay solvent.”
The utilitarian in me thinks that the best use of funds would be to the opportunities with the strongest possible upsides. This is logical. But, and However, it is impossible to tell which stocks will do better than others.
The market is full of surprises. Every day things change, and no one can accurately predict what might happen.
Therefore
And so therefore it is appropriate to take a deep breath, take a step back, and consider the situation.
One of the measurements I use is the position of a stock in its 52-week range. Namely, among many other metrics and statistics, I pay attention to the current price of a stock within its 52-week range, expressed as a percentage. When a stock frequently bounces near the bottom of its 52-week range, and then continues to make new 52-week lows, then I know it is time to pay attention.
Making new 52-week lows is not particularly a signal to buy. It does tell me that the decline is real. There is nothing that might prevent a stock from continuing to decline even further.
I also try to be aware of a stock’s entire history. For example, what does the “Max” setting on the graph for the stock in finance.yahoo.com show? What were the peaks and what were the valleys? How does the most recent decline compare to other historical declines?
I also check the prices I may have paid in the past for this stock, both specific buys as well as the price paid during dividend reinvestments.
All In All
Taking as much information as reasonably possible into consideration, I might initiate a buy. I know I will be unable to pick the exact bottom. Buying just before or during a decline is probably the best time to buy.
As a dividend investor, not only am I looking for a low price, but for my dividends to buy more shares through dividend reinvestment. My dividends buy more shares or parts of shares when prices are low. If I am right and I have picked a low price, then in the future, hopefully, the price I paid now will be seen a bargain. The shares I accumulate during a bear market allows me to collect more dividends which then can buy more shares, an so on.
We do hope bear markets do not last forever. But a bear market makes opportunities real.
Do you see bear markets as terror, or as opportunities? You can let me know here.
The illustration of aeolian sand “waves” is from “Waves of Sand and Snow and the Eddies which Make Them” by Vaughan Cornish, in 1914. Courtesy Biodiversity Heritage Library.
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