The recent stock market drops are a good thing for the overall market. I think the recovery has been too fast and based somewhat too much on the fed temporary easing… it has to end sometime.
It’s about time for the markets to show strength on their own merits.
Some smaller pullbacks now are better than another much larger crash later in the year. Consider the pullbacks now as a good opportunity to sell some positions where the current price is high compare to the value of the business and make some buys of stocks that are selling at a discount.
There’s usually always some good deals in the market and they often become better deals when the overall market is going down hard. Make of list of companies that look attractive and judge them based on their current and future business prospects compared to the current price.
I’ve already started too and plan to buy more if prices continue to go down more.
If you’re still nervous, consider investing in solid companies with reliable dividends. For example, I like Merchant’s Bank (MBVT) with an over 4% dividend. They are rock solid and have consistently paid a dividend for years. Worst case scenario the stock plummets and I still get my 4% on my original investment and plus I get to buy more for a larger dividend.
Other stocks with decent dividends are Intel (INTC), Cisco (CSCO), Microsoft (MSFT) and GE (GE). All of which I have current long positions in.
My primary strategy is to create a list of companies that I have at least some personal knowledge of. Which mainly for me would be companies I either personally use, do business with in some form, or at least are in industries I have personal knowledge of.
Recently, I’ve made purchases of Cisco (CSCO), which I believe fits my strategy, not as strongly as I would like, but enough to be considered.
I then determine what I believe the value of the business based on a variety of factors. Then I wait for the price of business to drop below this value I’ve determined. Once reaching a target price below the business value that reflects the risk or uncertainty of my value of the business I buy if my assumptions have not changed.
Because my target prices are usually quite low to the current market price, most of the time my purchases are made upon a severe pullback in the market or some overreaction to current news for a particular stock, which is the case with CSCO. The price has continued to drop since I bought my original purchase and additional blocks. I am reluctant to add more, as with any purchase, I must allow that my assumptions could be wrong about a business, which is why I try to diversify enough to allow for some error. In the case of Cisco, at the current price, I would definitely be adding some more if wasn’t already such a large percentage of my portfolio. It’s a great price to initiate a position if you don’t already have one.
I guess what’s important is to have a strategy that you do really believe in and one that doesn’t cause you to be alarmed when your picks drop a lot. When I first started investing in the 90s, that was the problem I had. I liked a stock I bought when I bought it, but when it went down, I would get scared because as it turned out I didn’t really believe in the methodologies I was using. The difference now, is I’m not scared with the fluctuations of stock prices… only with actual business decisions that I disagree with over time.
At this time, I believe that there are some nice possibilities right now in big tech… Hewlett Packard (HPQ), Intel (INTC), AMD (AMD), Microsoft (MSFT), and SanDisk (SNDK) are some potentials that I may consider initiating positions or adding to existing positions. Big tech in general seems to be really out of favor right now due to temporary reduction in tech spending, which will rebound at some point, it’s just a matter of time. If you believe in the continual progress of technology, the internet, cloud computing, high speed internet, more services being offered online, you have to be bull on big tech in the long run. For example, I’ve held off from making extra tech purchases for some time now, due to economic uncertainties, but I will have no choice but to upgrade my computing equipment as it’s either wearing out or going obsolete and I imagine there are many other individuals/firms in a similar situation.
I believe the market is really overreacting on this one and taking a very short term view, creating some good opportunities for the long run.
When investing, you sometimes need patience. Especially when you invest in companies that are out of favor with wall street. However, it’s usually when wall street hates a stock, that it gets cheap. As an investor, it’s our job to research these stocks and determine which ones deserve to be down and which ones are simply a victim of an overreaction or loss of patience.
Two of my last investments fall in this category. Ebay (EBAY) and Microsoft (MSFT) both have been out-of-favor with wall street. Ebay has been down for what I believe are some misunderstandings by the media regarding their business, which if you researched you would have found they are stronger than wall street gave them credit for. There was also an over-reaction in the believe that Google Checkout was going to destroy Ebay’s Paypal business.
Microsoft was simply a patience issue. Wall street was tired of waiting for new operating system and office software to come out. Wall street reacted as though they were never going to be released and so the stock was sold off very heavily. This posed a great opportunity for investors like myself to pick up some shares really cheap. However, for a while the shares did nothing, but the last 2-3 weeks have been great for both Microsoft and Ebay.
A couple of my current situations that I believe to be similar are Labor Ready (LRW) and Sandisk (SNDK). They are both currently out-of-favor with wall street as their stocks are much cheaper than most stocks I watch. I imagine the Labor Ready is down due to fears that the recent minimum wage increase will hurt them and Sandisk is down to a current oversupply of chips, which they will most likely need to mark down to sell. I don’t think either of these problems are going to affect the companies in the long term. Both are strong and stable businesses. Labor Ready deals in temporary manual labor and they have minimal competition and they are very profitable. Labor Ready is expected to get a lot of work through post-Katrina construction. I think the wage increase concerns are overblown.
Sandisk will simply discount their current stock and make more money on the forthcoming chip production. They continue to stay ahead of their competitors with new innovations and they have a ton of cash and no debt. With the increasing popularity of handheld electronic devices such as digital cameras, cell phones with storage, mp3 players, handheld video players there is going to be increased demand for small storage cards, which they’ve got. Sandisk’s cards are regarded as the most innovative and reliable. I would not bet against them.
Buying shares in either of these companies and waiting a few months or a couple years should pay off very well.
The bottom line is you must do your own research, don’t just take what the media and/or wall street says and you must have patience if you are going to bet against wall street.
Full Disclosure: I own shares in both Ebay and Microsoft. Sandisk and Labor Ready are potential new investments that I may or may not make in the near future.
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