I am not a fancy stock market trader and my current practical knowledge about stock trading does not extend much beyond the “buy and hold” strategy of investing.
A few months ago, I mentioned about my almost-all-cash portfolio. Slowly, but surely, I am trying to move some of the cash into the stock market. Because of this, I am in a buying mode at present.
I am probably naive about analyzing the market fluctuation, but in the current situation (with the “buy and hold” thinking and the eagerness to buy more stocks), a fall in stock prices seems like a “grand sale” for me. So when I read headlines like this:
Dow stumbles 280 pts Friday amid broad market sell-off
I get all excited. 
To me, that sounds like “stocks on sale“.
It was too late to act on Friday, because I didn’t read about the sell-off soon enough; but, I did place a buying order for a few SPY (an exchange traded fund (ETF) tracking the S&P 500 index) shares which was executed first thing on Monday morning - right before the rally. I got the shares at $143.61 apiece. During my earlier purchase in June, the price was $151 per share. Apparently, I have now effectively reduced my average buying price for the share.
This sounds like “market timing” - a risky game for frequent traders, but I am not too worried about it right now because I am in the buy-and-hold mode. If the price drops further, I am going to buy more aggressively. If the price increases, I will switch to my normal investing frequency, but still keep buying. I am probably more of an opportunist than a market timer.
Also, I may be playing it too safe by buying SPY in these times (instead of individual stocks), but my comfort zone doesn’t extend much beyond SPY (and at times, VWO - Vanguard Emerging markets ETF), so that’s as much as I could take advantage of the situation.
For now, it seems like a good thing that I don’t know how and when to sell.
By the way, I have to mention that Zecco is really making investing fun - it’s been a rather smooth ride with them till now.
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Should I even care whether stocks go up or down?
While I’m not a fan of the “buy-and-hold” method of investing, I do believe you have the right idea when it comes to market sell offs.
For many people who are invested in the market, they immediately get panicky and worry about major market sell offs. Meanwhile, most people that are sitting on the sidelines see a point to invest at.
As long as your investing in strong sectors (i.e. outside of financials), you can greatly benefit from major market declines. You’ll be getting in on the cheap and benefiting from others worries.
Keep up the great work and I love the site!
-Sam from MarketMatador.com
If you want really cheap, may be you can look into Real Estate and Mortgage/Lending funds and ETFs. Of course, this is a lot riskier than SPY.
Minimum Wage: You should. If you are pointing towards the fact that you don’t yet have a brokerage account and don’t trade stocks - then you should start doing it. In fact, that’s where Zecco’s free trading power can be truly realized - even the lowest paid worker can now trade without having to pay any fees. Don’t worry about not (yet) having enough money to buy complete stocks - open a Zecco account and start making very nominal contributions each week. Even $10~$20 is fine. Whenever you have enough to buy a single share of SPY (or any other stable share you want), just go ahead and buy it.
If you don’t care yet whether the market goes up or down, I am sure you will after a few months.
Market Matador: “I’m not a fan of the “buy-and-hold†method of investing” - you are probably hinting towards selling stocks at the *right time* to maximize profit. I agree with that ideology, but I don’t think I have enough confidence in my knowledge to do something of that sort yet. There may be some scope for it in the future - you never know.
Pinyo: SPY is an ETF. In a few months, I will diversify into other ETFs as well (right now it’s just SPY and VWO). Real Estate and Mortgage sounds good, but with the recent news about mortgage companies going bankrupt, I will need a very high level of confidence to mess with these options ~ don’t know when that’s going to happen.
I love that you think of the stock market as “being on sale” during a big sell-off. Warren Buffet says “be wary when others are greedy and greedy when others are wary”. That’s some of the best advice out there.
If you combine your strategy to the buy-and-hold strategy, you mind find wealth!
I read many time that when the market is dropping, it is the perfect time to buy. You simply have to wait until your favorite stocks drop and you take a dip.
Are you trying to short-sell as well? I am very interested in this technique but still never tried it…
I think your excitement is asymmetric. You get excited about buying when something is cheap, but you don’t conversely get excited about selling when something you own is dear? In terms of the Buffetism that Carter quoted above, you’ve got the “greedy when others are wary” down, but how are you doing with the “wary when others are greedy” part?
The other comment I have is that you may wish to not be so taken with how big financial media characterize daily price swings. They call it a “stumble”, a “broad market sell-off”, when the broad market dropped a little over 2+%, eh? That’s not a sell-off, it’s just a little volatility (granted, that kind of volatility has been increasing recently). The financial / business headlines are written to be sensational, to lionize the day trading mentality. An investor isn’t even fazed by daily price fluctuations unless a particular stock that she/he owns or would like to own is close to a carefully and previously evaluated buy/sell price. An investor generally ignores financial media headlines and hype.
I interpret this kind of volatility as a good sign of market health. The market’s blood pressure had been unnaturally low over the past several (2-4) years. There are always specific bargains to be found (regardless of whether a given day of trading is down or up), but I can’t say that the broad market is anywhere near a “grand sale” or “stocks on sale” level. Anyone care to say where the earnings yield on the S&P 500 is presently, relative to its historical average?
Golbguru,
Thanks for your submission to the Carnival of Stocks. Your post is included in the August 13, 2007 edition.
In response to Steve’s question regarding the valuation of the S&P 500… the market is very overvalued in relation to the last 50 years. Past 50 year average is about 18 P/E…currently the S&P is around 30. So not exactly a sale when you look at things in that perspective.
But the increase in valuations can be attributed partly to more wealth than ever before being poured into the stock market via baby boomer retirement investments beginning in the 80’s. And the 90’s when everybody and their brother got into “playing the market.”
It all boils down to one simple rule:
buy low, sell high.
You’re doing it right.
I’d look into buying VTI. It tracks ten times more stocks giving you more diversification. It also exposes you to smaller companies which might reduce your risk by trading differently than the big companies.
Shaun Carter, if you go back 125 years, the mean P/E is even lower, about 16.
Hey man, trading in forex is much more interesting and fun. Your strategy to buy and hold is good and it works also in forex market. These markets(forex market and stock market) are connected together, when some stock fall, particular currency fall also. The difference is that you can win more with forex margin accounts. I am sure that you already know that info but anyway I decided to share it with you and your readers. Thanks.
“I am probably more of an opportunist than a market timer.”
I swear that’s the mentality that Peter Lynch recommended 15 years ago in the very first finance books I read.
I agree. I love when the market drops off like this. If you do your homework and can testify that stocks you are looking at are good companies that are constantly growing, they will eventually pull out of the funk caused by weariness in the market.
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