One can never predict the market. That is one fact that we know about the stock market. Not one individual knows what the price will close on for any given day, for any given stock. I read an article the other day and it made me smirk – there has never been one person to buy a stock at it’s absolute lowest point only to sell it at it’s absolute highest point. This is why I don’t try to time or predict the market.
Why I don’t try to time the market
This post is really about why I don’t try to time the market. I have had countless friends, co-workers, individuals in the community and other fellow bloggers asking if I am selling a stock because the “market” is so high. Yes, yes it is very high, however – I just updated my portfolio and my portfolio has a 17 P/E, based on the weighted average of stocks in my portfolio. This is compared to the 24-25 P/E that the overall market has. It’s a difficult decision for some, everyday, to debate on whether to sell, hold or buy a stock, especially at market highs, I definitely understand that – as I am facing the same stock market as everyone else is! The stock market opening and close amount is the same for everyone. I’m going to break down what I see, as I’m not going to say a decision to hold, sell or buy is wrong. I’m just going to state the position I take and why.
As far as it relates to valuation in relative terms to Price to Earnings, yes, some stocks I have are in the mid-to-upper 20’s and even beyond that, but I also have stocks that are in the low-to-mid teens. Does that mean I sell everything? No, no it does not. However, does it mean that I am going to buy the stock that is trading at a forward P/E of 22 or some of the lower P/E? Heck no to that as well. Am I holding? Yes, yes I am holding right now. Here is a brief example – I had a few co-workers ask me if I’m going to sell a stock because the yield went from 3.60% to 3.00%. I asked – do you think they’ll increase their dividend come the 4th quarter as they usually do? They said – Probably. Then why would I sell a stock? Are their earnings growing? Yes. Is the payout ratio alarming? No. Is the P/E higher than it was? Sure. However, these are all moving targets. Even for those with low P/E valuations, I still want to understand fundamentally where they are going and if anything has changed about how the business is being run. My strategy has not changed and I never added a “sale” position in my strategy, as I think this falls more towards the “trading” and “timing the market”. *I will add – if tax rates changed on dividends or owning a stock in an unrealized gain position, this may cause me to re-think the strategy* haha
I am not a trader. I buy assets that I find valuable that produces me a source of income. I do not know where earnings will truly lie in the future, but that is why we buy stocks that aren’t fundamentally difficult to understand, at least we try not to. Here is a funny but very, very true example (I am sure the majority of individuals can attest to this situation, right here!), Is Target (TGT) still open for business and still selling Starbucks (SBUX) coffee inside? Am I still swishing around my scope mouthwash that is produced by Procter & Gamble (PG)? Did I just fill up my gas at Shell (RDS) and buy a 0 calorie Gatorade on my roadtrip that is produced by Pepsi (PEP). while using my credit card produced by Visa (V) through JPMorgan Chase (JPM)? You better fricken believe it. These business are just that – still in big business! For the record – I own Target, Shell, Pepsi and Visa.
However, just because businesses are still in operation and are being used more frequent then ever before, does not provide me a sure enough reason to buy the stock. I look at valuations that are within our diplomat stock screener. If the P/E is above 20, I more than likely am not going to consider it. What am I willing to buy? The August stock watch list I came out with is more of my fair assessment of stocks that show signs of slight undervaluation. I know I ask myself, why do I hold the stock if it’s so high? I like the companies I own, if they pay a consistently increasing dividend with fundamentally sound metrics, then I will typically hold.
Building Up the Ammo
As I am still doing the research, analyzing stocks, looking at 5-year dividend yields vs. their current yield and reviewing the payout and price to earnings ratios, I am building up my ammo. As I am reviewing their share buy back strategies and earnings directions of the companies I own or want to own, cash is slowly building in my account. What I’m very fortunate about this, is that when I do find the right value – I will be more than ready for a purchase, no doubt about it. In fact, I am looking forward to it. I can, at this point, luckily make 2-3 very solid purchases and be standing in-line to make a 4th purchase. Am I in a rush? No, no, no real rush, even with my 2016 goals out there, I just need to focus on valuation metrics, our stock screener and purchase when it is priced right.
And in the meantime – due to the three strategies I am employing, dividends are being reinvested still from my portfolio throughout the months and essentially – activity is still occurring. One thing I won’t be doing is timing any of the markets, selling my positions and worrying. I will be doing the same thing as I’ve always done – buy when the stock is priced right! Am I crazy? Please let me know, I would love to hear your thoughts. I know I have seen a few out there selling, I still see buying opportunities out there with purchase articles and of course – we posted an awesome month worth of dividend collections for July. What is your position in the market and have you changed your strategy? Pop it on below!
-Lanny