Time to Start Buying?

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Trying to time the bottom is a fool’s errand … a better litmus test for buying … where Eric is looking today … how our current bear market shapes up to past bears

Buy low, sell high.

That’s what every investor attempts to do.

Today, with so many stocks having taken it on the chin, an increasing number of investors are wondering if this is a “buy low” moment.

On the other hand, the economic data we’re receiving are getting worse. That suggests that more market declines could be in front of us.

So, how do we navigate this?

Well, unless by sheer luck, none of us will time the bottom perfectly.

Fortunately, perfect timing isn’t a requirement for generating wonderful long-term returns from stocks.

Given this, many investors would benefit from a slight change in perspective…

Rather than asking “has the market finally bottomed-out and it’s time to buy?” perhaps the wiser, more realistic question is “are stocks currently priced to make solid returns several years from now – even if they head lower in the short term?”

This question removes the burden of perfection. And that can be incredibly helpful given that many of us suffer from stock-based “analysis paralysis.”

So, are stocks currently priced “attractive enough” to warrant some buying?

Yes, according to our macro expert Eric Fry.

From Eric’s latest issue of his free newsletter, Smart Money:

Most likely, the major averages have not yet reached their bear-market lows.

Based on probabilities, the stock market averages will drift even lower than they are today and reach their ultimate lows a few weeks or months from now.

That said, the stock market is not one big monolithic creature. It is a market of stocks, more than 8,000 of them. Even if the S&P 500 does not bottom out immediately, many individual stocks will.

“Best-of-breed” stocks, in particular, tend to bottom out first, and then move higher while the rest of the market is languishing.

And because we investors rarely get the opportunity to buy best-of-breed stocks on the cheap, we should be looking for opportunities to do that — starting right now.

***What history tells us about how much longer we might be in this bear market

Let’s dissect Eric’s analysis.

He begins by suggesting that the major stock indexes most likely haven’t bottomed. And it could be months from now before we see those ultimate lows.

So, what does history tell us about how much longer it could be, on average?

Let’s start with some perspective on where we are today.

From its most recent high in early January, the S&P is down 21%. That’s an official bear market, as defined by “down 20% or more from the recent high.”

The Dow is down 17%, so it’s not yet in a bear market.

Finally, the Nasdaq is down 30%.

From a duration perspective, the Nasdaq has been headed south the longest. Its decline began on November 22. That’s 213 days.

The S&P’s correction started on January 4th, so that’s 170 days.

And the Dow peaked a day later on January 5th, or 169 days ago.

How does all this compare to the average, historical bear market?

From CBS News:

On average, bear markets have taken 13 months to go from peak to trough and 27 months to get back to breakeven since World War II.

The S&P 500 index has fallen an average of 33% during bear markets in that time…

History shows that the faster an index enters into a bear market, the shallower they tend to be. Historically, stocks have taken 251 days (8.3 months) to fall into a bear market. When the S&P 500 has fallen 20% at a faster clip, the index has averaged a loss of 28%.

So, if the average S&P bear market is 13 months top-to-bottom, and the S&P is currently not even six full months into its decline, obviously the numbers suggest we’re not even halfway done.

On top of that, if the average S&P bear market falls 33%, our current 21% decline appears light.

However, the good news is the S&P has fallen into a bear market faster than the historical average. That suggests we’re not too far away from the potential shallower bottom of 28%.

For even more details on when we might be through the worst of this, in a report published yesterday, Goldman Sachs suggested that the low point in the stock market usually comes about six to nine months before earnings per share bottom, and three to six months before the economy’s low water mark. But that’s only after inflation has started receding, which hasn’t happened yet.

Put it all together, and Eric’s call seems accurate – we’re not yet at the low, and it could potentially be months away.

So, why buy now?

Well, let’s underscore a key distinction – when Eric suggests it’s time to buy today, he’s talking about “best-of-breed” stocks, not the average S&P stock.

As he noted, these stocks tend to rebound first. And they’re so infrequently “on sale,” that buying when prices are attractive is a rarity that demands action.

So, let’s talk about how to buy, and then specifically, what to buy.

***Overcoming your fear-based aversion to buying when stocks are falling

Stock market analyst Cullen Roche once said, “the stock market is the only market where things go on sale and all the customers run out of the store.”

Of course, this fear is natural. Buying when a stock is in freefall appears to be a guaranteed way to destroy your hard-earned dollars.

But again, the new question isn’t “will it fall further?” it’s “is today’s price attractive from a long-term perspective?”

Here’s how Eric put it back in March of 2020 when the market was imploding:

Stock market selloffs are the extreme events that create opportunity. They produce the panic selling and “washouts” that usually offer great moments to make savvy long-term investments…

History tells us that moments like these are what buying opportunities are made of.

So, if you have the stomach for it, do a bit of buying over the next few weeks… while others are fearful.

Now, if buying today is too tough for you, take even more pressure off yourself by dollar-cost-averaging into your desired stock.

In other words, spread out your investment over a period of weeks or months.

Rather than putting, say, $4,000 into a stock tomorrow, divide it up into four tranches of 25%. Invest $1,000 tomorrow, then perhaps the remaining $1,000 allotments spaced 30 days apart over the coming months.

If your stock moves lower after you’ve invested some, okay, you still have investment capital that will benefit from lower prices. But if your stock climbs after you’ve invested some, okay, some of your money is benefiting from your lower cost-basis.

How much and how frequently to invest is a function of your unique investment temperament and risk profile.

On one hand, you don’t want to invest so much that you’re losing sleep at night. But being too comfortable isn’t always a good thing either. My favorite investment quote on this idea comes from Rob Arnott of Research Affiliates:

In investing, what is comfortable is rarely profitable.

***So, what exactly is a “best-of-breed” or a “forever” stock?

Back to Eric:

These are the stocks you hold through thick and thin, unless the rationale for owning them changes significantly or you decide to replace one of them with a different stock…

While there’s no set definition of a world-class business, I believe they share at least four critical traits:

  1. Forever Stocks possess an impregnable competitive advantage over their competitors — a “moat.”
  2. Their competitive advantage shows itself through rising revenue and cash flow. (Earnings should be rising as well. But accounting gimmickry can easily manipulate profits, so I generally ignore reported earnings and focus mostly on revenue and cash flow.)
  3. They use cash flow to enrich shareholders, through rising dividend payouts, share buybacks, astute acquisitions… or a combination of all three.
  4. They maintain a healthy balance sheet in order to preserve their financial flexibility and resilience.

In his issue, Eric points toward Amazon and Nike as examples of Forever stocks. They’re both world-class businesses with beloved brands. And barring something completely unexpected, they will remain this way for decades to come.

Yet, as I write, Amazon is offering investors a 40% discount to its price tag from July of last year.

Meanwhile, Nike is on sale for 39%-off last November’s high.

Now, could these stocks go lower?

Of course. And you should expect that.

But please permit me to beat this dead horse one more time – you don’t have to time things perfectly and buy at the bottom.

You only have to buy at a price that is likely to make you money a few years from now.

Bottom line, an increasing number of Forever stocks are attractively priced today, even if their respective lows remain in front of us.

I’ll give Eric the final word:

It takes guts and a long-term commitment, but if you are even thinking if taking advantage of quality bargains, now is the time to put this philosophy into practice.

Have a good evening,

Jeff Remsburg


Article printed from InvestorPlace Media, https://investorplace.com/2022/06/time-to-start-buying/.

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