Buying Low And Selling High Is Hard To Do
When asked what the stock market was going to do, J. P. Morgan said, “It will fluctuate.” I believe this to be an unsurpassed prediction of market behavior. Many investors resist this truism and allow normal stock ups and downs to scare them into bonds or bank deposits. That’s a pity as they could enjoy much improved investment returns if they showed more patience, a profitable practice probably enhanced by turning off the televised financial news.
Actually, fluctuations as reflected in various volatility indices have moderated over the last few months. There still seem to be sufficient anxiety provoking stimuli, as many investors seem spooked by almost anything. Without reciting the list of possible negative events reaching from Greece to China and points between, it may be more useful to reflect that the market is up 16% so far this year.
I have not forgotten the extreme fluctuations during the 2007-08 financial crisis nor how grim the outlook appeared when President Obama took office soon after these troubles. Pessimism was everywhere then but the stock market has since almost doubled. Investors may find Mr. Morgan’s comment of some comfort in helping them add to positions in sound stocks during market dips.
There seems to be a human failing among investors to want to “take profits” and eliminate their anxieties by selling out. Among registered investment advisors like myself, we often agree that one of our greatest services to our clients is to advise them not to let disturbing news stories send them into panic. This week, I had to do this with one of my clients who wanted to sell everything, probably because the client’s unrelated real estate investments were doing so poorly.
Uncertainties abound today but their resolutions may not be as negative as some fear. Curiously, corporate profits, the foundations of stock prices, are at historic highs while interest rates are at historic lows and inflation remains under control. Valuations are still moderate on most stocks and these factors could bring about an extended stock market climb.
Records of mutual fund sales and redemptions reflect an unbroken record of individual investors buying near market tops and selling out at market bottoms. No one can forecast these peaks and valleys and even those who manage to sell out before a market dip miss the surge when the tide reverses.
The discipline to buy when all around are frightened is tough but rewarding. It’s even harder to shift to more conservative stocks and build up reserves when people are bragging about their market profits and sports bars are featuring CNBC instead of sports. It helps to avoid reacting to breaking news as, in most cases, institutional investors have already anticipated them.
Investors have an edge through avoiding competing with the hedge funds of the world that seek short-term profits. With very favorable conditions for an advance, the timing looks good to add to stocks. Some stocks already have developed high valuations, leaving them vulnerable to sudden drops on disappointing earnings as happened to Hewlett-Packard. Better hunting appears from promising companies whose stock prices have lagged the market advance. It is, of course, essential that the company is now showing unmistakable reasons for price recovery.
One is AES (AES-$11), a relatively unpublicized company that happens to be one of the world’s largest power companies. It began operations in 1981 with a power plant in Texas, added others in the Midwest and then began adding power generation businesses abroad. AES now operates in 27 countries with plants powered by traditional sources as well as increasing “green” energy. It operates electric utilities for 11 million customers ranging from Indianapolis to Cameroon, Brazil and El Salvador.
Sales are $17 billion, increasing at 9%. Earnings dipped with headwinds from foreign exchange, tariffs and commodity prices but are now back on track. AES recently reported slightly increased earnings and reaffirmed its guidance for all of 2012 to a range of $1.22-$1.30. It also declared a cash dividend of $.04 a share, not much but its first dividend since 1993.
Fluctuations are guaranteed, as Mr. Morgan said. Their nature scares some investors away, leaving a rewarding playing field for those with patience and discipline.
Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1993. [email protected] 949.494.1376/