Investors everywhere have heard the old maxim for success: buying low and selling high. Of course, too many tend to do just the opposite. We get caught up in rapidly rising prices and buy into the euphoria of big rallies. And then we run for cover as prices are about to hit what later proves to be â€œthe bottom.â€ So how are you seeing the current investment environment? Is it a bottom — or a top?
We can look for clues to help identify which we are seeing now, though we should remain wary. Unfortunately, bottoms and tops can only be accurately recognized well after they happen. What appeared to be the bottom in many technology shares earlier this decade turned out to be mere rest stops, as they fell to even lower prices.
Market bottoms do, however, share some common traits. First, as Investors are nursing big losses, the economic picture appears to be dire and getting worse. Then recession fears slowly give way to the idea that something even worse may be happening.
Arenâ€™t we seeing that set of circumstances today? We hear daily news items reporting that the domestic economy is looking dire, indeed, and, quite possibly, getting worse by the week. Jobless claims for unemployment insurance are rising predictably, and retail sales are in the tank. And the big auto makers are asking for bailouts to keep from shuttering.
With so much bad news, itâ€™s easy to see why buying low is now such a hard choice for many investors. When conditions look bleakest, when stocks fall to prices that later look like the buying opportunities of our generation, most investors are looking for safety!
Now, do not read this column as a recommendation to run right out and load up with shares of domestic stocks! The U.S. economy is truly in bad shape, and we find that those analysts reporting that this economy may be the worst since the Depression are no longer getting laughs in response to their comments.
It seems that greed, incompetence and a lack of oversight have created one horrific mess in the markets, and the federal budget deficit is setting staggering new records that should frighten all of us. The domestic economy is truly in turmoil and likely to get worse. Any rallies in our home markets will likely prove to be bear market bounces — at best.
Low share prices in many well known, domestic companies like Citigroup, Goldman Sachs or G.M. may even prove to be signs of impending disaster, since losses in their sectors are mounting in scary ways. Those low share prices could fall even further as many hedge funds, previously considered safer options during down markets, are blowing up, too. And that occurrence could generate more redemption requests, forcing the selling of shares that may already be sitting at bargain levels.
What investors should consider in trying to balance these concerns is how many high-flying shares bought in 2007 enjoyed wonderful rallies, moving higher over several ensuing years after they were snapped up at much lower prices by sharp-eyed investors. Donâ€™t we all wish we had the foresight to buy shares of Brazilâ€™s large energy company, Petrobras at its under-$10-split-adjusted price and then watched it run up to over $70/share, after the come-lately crowd finally started plowing into its shares?
Or we could have been loading up on the Russian cell phone service provider Vimplecom at under $5/share and then enjoying the ride higher to over $40/share about nine years later. But more investors were buying at much higher prices later in the cycle. Of course, with the Russian economy on the brink of collapse in the late 1990s, who was willing to take the risk when Vimplecom shares were truly cheap?
Of course, we all need to remind ourselves of the Saudi prince who loaded up on shares on a near-bankrupt American financial company during our last economic recession in the early 1990s. That company was the aforementioned Citibank, as it was known then, and the prince amassed a fortune from it. Perhaps much of that fortune has now been lost, since those same shares have fallen to under $10/share, amid concerns about more losses yet to be determined.
Before making your move to buy low, look inward and ask yourself how much risk you feel good about taking. Keep in mind the ongoing news about our economy, as bad as it is now, and the rampant corruption and incompetence, which has been so damaging to our financial sector and spread pain around the world. Just how eager are you to buy shares at todayâ€™s much lower prices, considering their cost just a year ago?
These examples show why buying low is so hard to do and why most investors havenâ€™t enough nerve to venture in where only a very few others dare to go. Usually, the fear of losing trumps the fear of missing out on bargains. But how long will we wait, sitting around for a couple years and then bemoaning how we could have bought Petrobras at $22, Vimplecom at under $10, Freeport McMoRan at $24 (while selling at under four times trailing earnings), or ConocoPhillips at under $50 (also at under four times trailing earnings)? And, yes, we learned again this week that these are the types of investments Warren Buffett is making, at least in the case of Conoco.
Are those earnings likely to fall and those P/Es likely to rise? Yes, but will Conocoâ€™s earnings fall by more than half?
Will we be regretting in a couple years that we could have bought a mutual fund in the precious metals sector with the price of gold stocks selling at about the same level as when gold prices were about $300/ounce vs. todayâ€™s $740? And yes, Iâ€™ll be the first to admit that the drop of gold stock prices has been frustrating and more than a bit unnerving –considering other economic factors.
But again, we must consider the underlying causes for share prices to fall enough to be considered bargains. We must be sure that they represent real value and can offer acceptable future price appreciation for the patient investor.
Again, do not assume that I am suggesting that you load up on these or any other shares. Our economic news is still too frightful, and with the S&P 500 still selling high, at about 18 times trailing earnings, that index could have more room to fall.
Take this column as simply an object lesson reviewing what buying low looks like, how it feels, and why it can be so hard to do. Itâ€™s easy to see why, when share prices are at their lowest and represent superior profit opportunities, most of us want nothing to do with them!
But for the careful investor who does his research and then takes small positions in what he considers bargain-priced shares, intending to add to those winners later, this could prove to be a wonderful time to go shopping.