Why Don’t We Buy Stocks When They Are on Sale?

As I came into the office Tuesday, I was reminded of what time of year it is. Every year a very large tree is set up and decorated in the lobby of the building. Years ago it was a Christmas tree but as times changed it became known as a holiday tree. This year, in order to spare the slaughter of an innocent tree, it’s a 10 foot steel cone covered in green, prickly plastic. So, as I walked past the holiday cone I was reminded about what’s coming later this week in the U.S. - Black Friday.

Black Friday

Black Friday is so named because it’s the day that retailers finally move into “the black” for the year and it’s the day that marks the unofficial beginning of Holiday shopping. It’s also the busiest day of the year for most retailers in the U.S. and a day that many items go on sale as businesses compete for those gift shopping dollars. Seasoned shoppers will do their research by scouring through local papers then line-up early in order to get the best deals - after all, if you can get the same item at a lower price, why wouldn’t you?

Strangely, when it comes to investing it seems that people want to pay more. Mutual fund sales show this time and time again. When markets are close to their peaks, mutual fund sales are strong, but when markets are close to their bottoms, mutual fund sales are weak. But who can blame investors? If we look at markets in the U.S., the S&P 500 Index is currently at levels similar to 10 years ago and while Canadian markets have faired somewhat better, it’s still been an ugly 10 years.

A Lesson In History

In 1974 the S&P 500 Index dropped from a closing value of 99.74 on March 13 down to a closing value of 62.28 on October 3 losing over 37% of its value (note that the index is based on price only and does not include dividends). And much like today, there were several events that were weighing on the minds of investors, such as:

1. The energy crisis following the OPEC oil embargo
2. The resignation of President Richard Nixon following the Watergate scandal
3. The loss of Vietnam war
4. An economy in recession

What investor would want to be in the market at a time like that?

Well, as it turns out, a very astute one. The table below shows the returns of the S&P 500 Index following October 1, 1974.

S&P 500 Index

From Oct. 1, 1974	1 Year	5 Years	10 Years	20 Years
Annualized return of index	38.13%	16.86%	15.63%	15.11%
$10,000 invested	$13,813	$21,793	$42,723	$166,942

The most important thing an investor can do right now is to learn from history. Although there are some differences between any two periods of time, there are examples of times in the past with many similarities to what we are seeing today.

Those past times represented outstanding investment opportunities in equity markets. No one knows exactly when the market will be at its bottom, but if you’re buying right now, you know for fact that it’s not at its peak. And, like many consumer goods, the market is on sale.

Comments

[Larry House:]

If you can assure me today's conditions are exactly like 1974, I will agree with your premise. If you can't, you are wasting space and giving dangerous advice.

2008 Nov 25 11:24 AM

[Boubou:]

It may take 10 years for stocks to recover even their nominal value. In real terms, maybe never.

2008 Nov 25 11:42 AM

[Smarty_Pants:]

Back in August Lehman common stock was on sale at $20 too, down from over $100. It now fetches a nice $0.04.

If being a 'bargain' is your only yardstick for buying, then you may be surprised to find out that the elevator hasn't yet reached the basement.

2008 Nov 25 11:53 AM

[jepittman:]

The author is referring to the S&P index not an individual stock. His point is a good one. Long term investors are being offered an opportunity for outsized returns rarely seen. The fact that so few are focusing on this is unfortunate but it is typically what you find at these points in the cycle.

2008 Nov 25 12:43 PM

[copperpenny:]

The same reason I do not by foods laced with hydrogenated vegetable oil,corn syrup,MSG,dextrose, disodium phosphate... even if they are on sale. I will buy a nice fillet mignon on sale at whole foods. Mutual funds bring all that other gobbley gook even if you do not see it, you need to read the labels or you end up with toxic junk. This is stock picking time. I do not want a basket of junk food.

2008 Nov 25 01:19 PM

[VenusRising:]

I agree that the author makes a valid point. Historically, the stock market ebbs and flows - but continues to rise. At this point the market is unusually low, however it must regain and grow. If you were to purchase stock now you are purchasing at a sale price. Buy low - sell high. Long term investors could potentially see returns as soon as 1 year, and most definately in 5 years. This case scenerio because more effective in an index fund where seveal individual stocks are pooled to create a mutual fund. Subsequently, picking an index fund that is sustainable for the future may be a wise choice considering the push for "green" goods such as solar and wind energy which is sure to pick up speed in the coming years as oil supplies dwindle.

The obvious conclusion is to have a well diversified portfolio of several options; mutual funds, bonds, gold, euros, individual stocks, life insurance policies with fixed cash values, etc.

2008 Nov 25 03:45 PM

[Skj:]

You have the cause effect relationship ass backwards..

Its not that stocks are on sale (cause), and no one is buying (effect)..

It is that no one is buying stocks (cause) and that has caused stocks to go on sale (effect).

2008 Nov 25 08:18 PM

[Skj:]

You have the cause effect relationship ass backwards..

Its not that stocks are on sale (cause) and no one is buying (effect)

It is that no one is buying (cause) and stocks are on sale (effect)

2008 Nov 25 08:19 PM

[Moon Kil Woong:]

Hmmm I've been hearing this when the market dropped 18%, then 25%, then 40%, now now. So, if stocks were on sale then well what do you call now, a super duper whammy of a sale? And at 6,000 you call it what? A firesale? The market is never on sale because it is based on what people are willing to sell and what people are willing to buy at creating parity.

Sale is a dumb consumer gimmick for unintelligent people to get them to buy things they don't want or don't need. Well I must admit, at this point in time I don't want or don't need stock.

2008 Nov 25 09:11 PM

[LCACM:]

In 1929 or 1974 US was not running huge trade deficits with China and other countries. The US had one of the strongest Industrial base in the World that was growing. In the last 25 years, that Industrial bas has been outsourced. In the past American Industry used to invent and manufacture innovative products such as TVs, Computers, Cars etc. now Wall Street is busy creating Toxic Financial Instruments. Also, the current financial and political leaders have not grasped the nature or magnitude of the problem. One cannot borrow one's way to prosperity.

2008 Nov 25 09:41 PM

[Mandy1:]

It seems that all the comments are either "yeah, buy any stock now...they are so cheap" or "no, Dont ever buy.". I think both extreme positions and are off base a bit. In reality buying stocks in any market is a challenging job. The decision now is which companies will come out the other end stronger than ever. Look for undervalued companies where the P/E ratios are not in line with reality and even more important is cash on hand. The companies with cash will buy the weaker ones and in the end be better than before. I have always made more money in a bear market than a bull. Its the small investors that sadly get hurt in an economic climate like we are experiencing. The bigger investors know how to invest in a declining market and position themselves to take advantage of the future. Smaller investors ride the market down, then sell do to fear. Then they re-buy after the market re-bounds effectively losing a big chunk of their hard earned money forever. There is always opportunity, you just need to be smart about your choices.

2008 Nov 27 02:00 PM