The Candy Store Is Open!

DOW Jones
Source: Yahoo Finance 10/15/2014

What a crazy market! The Dow Jones Industrial Average went from a high of near 17,350 around September 19, 2014 and then closed today at 16,141. (And today’s close even recovered from an intraday low of 15,855!) Most of that drop has been over the past 5 days too. In fact, on October 6th the Dow was at 16,991, dropped to 16,719 the next day, only to rise back up to 16,994 the following day.

Has it been an expensive couple days for you? Were you selling in order to quickly lock in what little capital gains were still left? Or were you selling in order to prevent further capital losses? Were the commentators on TV changing their bullish tone that they had only a month ago? Of course, the doomsday sayers (or at least those with extreme views on market movements) make for the “best” TV. Who wants to listen to people tell you to patiently keep accumulating stock assets?

Rather than panicking, I actually relished this opportunity to buy stocks at a discount. So in that respect it was more expensive than a usual Tuesday and Wednesday if you count the trading commissions. It sort of feels like being a little kid with his allowance fresh in hand and rushing into the candy store. And, it was similar in more ways than one. Much like my allowance never seemed to go far enough, today I wish I had more cash-on-hand to buy more stock…

I don’t know if the market will continue to drop, if this is the end of the “correction,” or even if this is a correction. I do know we are still ahead of where we were in 2008 and way ahead of 1998. Maybe stocks will continue to drop, move sideways, or go back up tomorrow. To be honest, it really doesn’t matter that much to me. In the long-term, I am bullish on growth in the United States and worldwide.

Since I am only 31, I am still completely in an accumulation stage of life. If I had been planning on retiring today, then yes, I would not want to sell everything in this stock market right now. But, since I am buying stocks for the long-term, cheaper prices are great! (And, once it does come time to retire, I’ll live on the dividends rather than selling things off piecemeal.)

This doesn’t seem like that hard of a concept to understand. However, many Americans, I bet, don’t get it. While I’m sure Google could find us some statistics on this matter, it is truly a shame at how bad the financial education is here in the United States. Learning about the economy and how stocks work should be a mandatory part of school, as much as science, math, history, and literature.

For the people that think it is crazy to buy more when stocks drop, I use this analogy: We’re all adults. Let’s imagine that your favorite Wisconsin microbrew is usually $8 for a six-pack. I’ll walk out with one pack. Now, pretend that it is on sale for a buy one and get one free (I wish!). I’ll for sure buy two six-packs and might even buy four since I’m hosting a Packer game party on Sunday. Packers win and now it is a week later. The Packers are looking at extending their win streak yet another game. I go back to the store to stock up on some more of that favorite beer. However, now the stuff I bought last week is $9 each. You know, for that price I’ll branch out and try one of Milwaukee’s other local but cheaper beers. However, I can’t wait until there’s that great discount again so that I can buy my favorite beer.

Makes perfect sense, right? How come most people can’t think of stocks in this way? They are only happy to buy more when the stock goes higher. It definitely reinforcing to buy a stock that just keeps going higher. We love being told we are right. We listen to the business channel on TV and everyone is bullish this and bullish that. We feel good about ourselves that we are buying as stocks go higher since everyone is too.

Wouldn’t it make more sense to wait for the cheaper stock prices and then buy more? It seems silly to go into a store and buy more of your favorite food item when it is more expensive. While I’m not saying that we should try to catch any falling knives by investing in poorly run companies that are legitimately dropping due to mismanagement, we shouldn’t be scared to buy high quality stocks at a discounted rate.

It is tough to time the market. If I knew stocks were going to drop big tomorrow, you’re right, I would wait until the “bottom” to buy. However, no one can accurately predict market futures. According to Burton G. Malkiel’s excellent book, A Random Walk Down Wall Street, even if someone had a system that worked, that small advantage would be negated once the system was brought into wider practice.

As of August 2014, Warren Buffett at Berkshire-Hathaway had $50 billion in cash. He needs to keep some of that money to pay potential liabilities as an insurance company, of course, but he also uses that cash exactly for moments like these. He loves to buy companies at a discount. And for him, it isn’t just a few shares here and there like the average person. He might buy the entire company or at least a large portion of it. (See a $35.7 billion acquisition of Heinz in 2013 and a $10.9 stake in IBM in 2011.) If I had to guess, I bet that Buffett is thinking about spending some of that cash right now; I sure would be!

I’m excited about writing a few more posts shortly talking about my recent stock purchases. I’ll also write about a very simple spreadsheet that I use to decide on how much money I can afford to put into stocks each month.

Full disclosure: Long BRK/B, IBM

Attribution for featured image of candy store: (Attribution-NonCommercial-NoDerivs 2.0 Generic)

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