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The Process of Buying Stocks Buying Stocks in a Volatile Market Oct 31, 2008 If you are a stock buyer and you aren't buying right now, why not? If you don't have the cash, then it's completely understandable. No money. No buy. Easy. If you aren't cash poor then it seems like the perfect time to buy, yes, even if the market goes down further. Buying in a Value Market I've always been more inclined toward purchasing value - no matter if it's a pair of shoes or a stock - and now seems like the ideal time to purchase value stocks. I'm not talking blue chips which always seem like such a safe haven to so many financial analysts. In my opinion, those stocks are still probably over priced and certainly don't give back to the stockholder in the way they should. 1-4% in dividends is not worth it in a stock with very limited growth options. The Problem with Growth Stocks On the other hand, as a general rule, I don't believe in growth stocks either, unless the stock is really a growth stock and truly new and undiscovered. In other words, unless it is truly a value stock (cheap). I don't like growth stocks because they are usually announced as such long after the real money was already made, so you've already lost out on the real profits. Besides, growth stocks generally don't give dividends and as of late haven't been doing much splitting. Which, in a market like the current one, leaves you with a stock that in no longer seeing growth but instead has probably lost a lot of its profits and won't even have the option of growing through dividend reinvestments. So, for me, growth stocks seem rather risky. A few people will cut their losses or get out early, but most won't which means that no real gain has been realized from growth which has been lost. Up until recently, I had been quite impressed with the high interest rates in a normal money market account. Of course, that's gone, but it was fun while it lasted. Buying in a Difficult Market I remember when the DotCom crash hit. It didn't really affect any of the stocks we owned at the time, as our stocks weren't bubble stocks, trendy market stocks, or popular financial analyst stocks. Instead, our boring little stocks that no one else liked did okay. We bought during that time. I think we bought Apple at $14.01 and Amazon at around $10.14. I can't remember what else. Just little stocks that hit bottom when the towers went down and the tech market was already having issues. Stocks we believed would pull through the rough times and that we felt were undervalued, we purchased. Blue Chip Blues The problem we ran into was that a lot of stocks never really pay off. Yes, those two did, but a lot of stocks like Coke and Disney seem to hover around the same numbers with dividends too low to be of real value. For example, Disney's dividend, at present, is at 3.4% and Coke's dividend, as of today, is 1.4%. With the market in such tumultuous times both these stocks have taken a nosedive, so any profits you may have made over the past ten years, or so, are probably pretty much whipped out while the dividend rates for these stocks are so low that you the dividend reinvestment buys simply don't amount to enough to make the dividend act as a profit maker for the investor, even during these market lows. Finding Something That Works We realized this problem a few years ago. I'm like a granny when it comes to stocks. I just wanna sit and watch my money slowly accumulate. I'm not speed monster looking for the fast track. I want security with a safety net. (That would mean a solid company with solid business practices and a long-term sustainable high yield.) But it wasn't doing that! The value of the stocks were increasing and decreasing based on market fluctuations and volatility. I didn't want the value of the stock portfolio to be so precarious and vulnerable. I started looking for stocks that paid higher yields and came up with a few that we're very happy to have today. The Benefit of Dividends One of our favorite stocks has been around since 1958. It has paid dividends since 1963. It has never lowered its dividend rates. Rather, it has increased them or kept them steady through difficult markets. Before the market went down, the stock paid an average of 8-9% yield. Of course, now that the market is wild and the stock deals with financials the stock has tumbled. I think the highest we purchased the stock for was around $33.15. Recently, I quite happily purchased the stock for $4.67. The price has gone as low as $4.00 and is currently at $7.30. Right now, the price may be low, but I believe in the stock and believe it is being hit by superficial factors rather than real problems within the company. The stock's yield is presently at 33.6%. Since the price of the stock is so low and the yield is so high the reinvested dividends are purchasing an awful lot of stocks for us. I believe the stock's yield will probably not increase for a couple years as the stock's value begins to climb back to where it should be. In the meantime, our dividends will be gobbling up lots of stock. Of course, there is a chance that the stock will, for the first time in it's history of over 50 years, decrease the dividend. That will not be a good sign and I hope it doesn't happen. It would be a sign that the company made too many risky business ventures during the financial highs and is taking an hit as a result. High Yield Dividend Sustainability A company that gives out high yield dividends over a long period of time can only sustain that action if it has the cash on-hand. You can't handout cash you don't have in your pocket. This means the company has a lot of money coming in and isn't spending it all on growing the company. Instead the company has decided to return some of the money back to the shareholders. These people are the ones who own the stocks. If you own a stock, you own part of that company. It means you are seeking profit from being an owner of that company. To me, this is a good model to look for in a stock and in a company. I want to see the cash. That is the whole purpose of buying stocks. You want profit. Well, high dividend returns in a financially secure company allows a shareholder to see quarterly profits that, in time, can generate the kind of wealth that few growth stocks can sustain over the long haul. Buying Stocks You Believe In Even in a volatile market there are good stock choices out there. In fact, it is undoubtedly the best time to buy as it is the best time to find deals, or reasonable prices. I don't recommend listening to the financial TV or internet programs to make your choices. I do recommend buying into a company you believe in when the price is right. I remember when McDonald's was hit hard by bad press, Sophie decided it was a good time to buy it. I think she bought it at just over $16. A couple weeks ago it was around $67, now it's around $57. The point is, she bought it at a price she believed was reasonable and she purchased a stock in a company she felt would not go away, even in really bad times. The yield on McDonald's is low at 3.5% but it was fairly high when she purchased it at just over $16. My Opinion The point of this article is to address that this is a fine time to buy, yes, even if stocks go lower. In fact, the best time to buy is when the price is low! Make a list of products you use that you believe in. Research them. I suggest using morningstar.com and considering high yield and value stocks. If You Like Gambling, Go To Vegas If you're looking to make a quick buck, your odds are probably just as good in Vegas. If you are interested in sitting on your money and allowing it time to grow then you might want to consider buying in a down market. Research. It's your money. If you're just going to blow it, buy a dress or go on vacation. Otherwise, take the time to trust your investments. That means trust the company you are buying into and the reasons you are buying into the company. Buy it Yourself. Buy What you Believe in. I don't recommend using a stock broker. Those greedy b*stards are the ones who got us into this mess into the first place. I don't believe they truly can make more money than you can, nor do I believe that they truly care about your portfolio or increasing net worth. They do care about commissions and often seem to be shopping/adrenaline junkies. Getting a rush out of the buying and selling things. That isn't necessarily good for the end buyer - you. So, take the time to do it yourself. Trust your instincts. Trust what you know. Trust what you have purchased, what you eat, what you drink, what you wear, etc. What companies do you swear buy? It's a place to start. It's a choice. It's the silver lining in this crappy economy. |
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