Why I'm Still Buying Stocks
With the Dow down 10% over the last five sessions, some of you are probably wondering whether I'm still crazy enough to be buying stocks.
You know the answer. Of course I am.
Call me naïve, call me delusional. But I bought last Thursday and last Monday. I bought again yesterday ─ and if the market heads lower today, I'll probably buy once more.
No, I'm not ignorant of America's stumbling economy, France's impending S&P downgrade or Wall Street's sundry woes.
It's just that U.S. large-cap stocks are already pricing in lots and lots of bad news. To be comfortable buying stocks at this level, I only have to be less pessimistic about future long-term corporate earnings than all the panicky sellers.
And that's easy.
To start, most of the sellers aren't thinking about profits and they're certainly not thinking long-term.
Heck, most of them aren't thinking at all. Fifty to sixty percent of all NYSE trading volume is driven by high-frequency computer algorithms. Their investing time-span is all of several milliseconds.
Throw these algorithms into a market churning with hedge funds, leveraged ETF day traders and panicked retail investors, all with an average investing horizon of 48 hours, and it's a small miracle the Dow ends down a mere 500 points.
Just consider the seller who at 3 p.m. Wednesday was unloading a Johnson & Johnson share with a dividend yield of 3.8% in order to buy a 10-year Treasury yielding 2.2%. He was giving up 1.6% in yield, plus upside equity in a AAA-rated credit for the 'safe haven' of an ever-eroding AA-plus piece of government paper.
This is an Armageddon trade the kind of trade that only makes sense if you believe the world will blow up or J&J will blow itself up, or if you happen to have a late-day margin call.
Have the sellers run through a specific scenario that embeds the collapse of the euro, an ensuing massive recession and the knock-on effects on J&J's margins and profits?
After all, J&J's share price, like any share price, should be a mathematical function of a company's future free cash flows into perpetuity.
Of course, most sellers did no such thing. They sold on fear. They sold on pessimism. They sold because other people were selling. They sold when, in fact, they should have been buying.
Nearly two-thirds of the Dow's 30 stocks today will give you a dividend yield greater than the current yield on the 10-year Treasury. This list doesn't just include quasi-utilities like Verizon or AT&T that yield a stunning 6%. At under $20 a share, Intel yields over 4% and trades with a single-digit P/E.
Are the attractive P/E multiples and solid yields in U.S. large caps a guarantee that these stocks can't go lower? No, of course not.
Didn't the collapse of Lehman and the recent S&P downgrade of the U.S. teach you anything? When it comes to investing, there are no absolute certainties, no guarantees. No investor has been able to repeatedly pick stock market tops and bottoms.
That's why I stagger both my stock purchases and sales over weeks or months. You will never get it absolutely right. The best you can do is keep your wits about you when everybody else is losing theirs.
Time and time again, history has shown that investors who buy when others are frantically selling tend to make a lot more money.
That's certainly enough to keep me buying.
Evan Newmark
You know the answer. Of course I am.
Call me naïve, call me delusional. But I bought last Thursday and last Monday. I bought again yesterday ─ and if the market heads lower today, I'll probably buy once more.
No, I'm not ignorant of America's stumbling economy, France's impending S&P downgrade or Wall Street's sundry woes.
It's just that U.S. large-cap stocks are already pricing in lots and lots of bad news. To be comfortable buying stocks at this level, I only have to be less pessimistic about future long-term corporate earnings than all the panicky sellers.
And that's easy.
To start, most of the sellers aren't thinking about profits and they're certainly not thinking long-term.
Heck, most of them aren't thinking at all. Fifty to sixty percent of all NYSE trading volume is driven by high-frequency computer algorithms. Their investing time-span is all of several milliseconds.
Throw these algorithms into a market churning with hedge funds, leveraged ETF day traders and panicked retail investors, all with an average investing horizon of 48 hours, and it's a small miracle the Dow ends down a mere 500 points.
Just consider the seller who at 3 p.m. Wednesday was unloading a Johnson & Johnson share with a dividend yield of 3.8% in order to buy a 10-year Treasury yielding 2.2%. He was giving up 1.6% in yield, plus upside equity in a AAA-rated credit for the 'safe haven' of an ever-eroding AA-plus piece of government paper.
This is an Armageddon trade the kind of trade that only makes sense if you believe the world will blow up or J&J will blow itself up, or if you happen to have a late-day margin call.
Have the sellers run through a specific scenario that embeds the collapse of the euro, an ensuing massive recession and the knock-on effects on J&J's margins and profits?
After all, J&J's share price, like any share price, should be a mathematical function of a company's future free cash flows into perpetuity.
Of course, most sellers did no such thing. They sold on fear. They sold on pessimism. They sold because other people were selling. They sold when, in fact, they should have been buying.
Nearly two-thirds of the Dow's 30 stocks today will give you a dividend yield greater than the current yield on the 10-year Treasury. This list doesn't just include quasi-utilities like Verizon or AT&T that yield a stunning 6%. At under $20 a share, Intel yields over 4% and trades with a single-digit P/E.
Are the attractive P/E multiples and solid yields in U.S. large caps a guarantee that these stocks can't go lower? No, of course not.
Didn't the collapse of Lehman and the recent S&P downgrade of the U.S. teach you anything? When it comes to investing, there are no absolute certainties, no guarantees. No investor has been able to repeatedly pick stock market tops and bottoms.
That's why I stagger both my stock purchases and sales over weeks or months. You will never get it absolutely right. The best you can do is keep your wits about you when everybody else is losing theirs.
Time and time again, history has shown that investors who buy when others are frantically selling tend to make a lot more money.
That's certainly enough to keep me buying.
Evan Newmark
Comments
Post a Comment