Don't Be A Fool: Pause Stock Purchases And Load Up On Treasuries

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Psycho Analyst


  • The stocks that get the most positive coverage are very rarely good buys even in a bull market.
  • There will likely be no real buying opportunities until the current downward momentum of the market flattens out.
  • Don't let fear of inflation push you to buy investments that add the pain of investment declines to that of deteriorating buying power.
  • Some kinds of bond investments are the best place for your money - though not the ones most popular with retail investors.

Shot of an unrecognisable businesswoman sitting in her office at night and feeling stressed while using her computer


Every day we read articles telling us what wonderful buying opportunities this or that stock offers. Very rarely are the stocks you see written about the ones that will make you money.

Take for example, AT&T (T), which has been repeatedly touted as the investment of the century without ever justifying a single such recommendation. AT&T performed the rare feat of dropping steadily during one of the greatest prolonged bull markets of the past 50 years.

AT&T Earned You Nothing Despite a Decade Long Great Bull Market

AT&T Lost Money Through the Great Bull Market

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And before you tell me how much you loved your dividends, note that this chart is a chart of total return. It includes your high dividends, assuming also that they were reinvested. If you held onto the Warner Bros. Discovery (WBD) shares spun off by AT&T, you are down even more as they have crashed by over 51%.

If you are a retiree living on those dividends, this is what the cash you invested in AT&T has turned into throughout a bull market where every dollar invested in an ETF that tracks the S&P 500 like The Vanguard S&P 500 ETF (VOO), The SPDR S&P 500 Trust (SPY), or iShares Core S&P 500 ETF (IVV) grew into $1.56. (I only graph VOO in the graph below as the return of all three S&P 500 ETFs is almost identical.

AT&T Destroyed Your Investment Capital While S&P 500 ETFs Grew It

AT&T Price Return Vs S&P 500 ETFs

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Yes, it is possible that AT&T will turn things around, but until it does, investors might be better advised to invest in one of the 499 other stocks in the S&P 500 whose management have a proven track record of rewarding investors and which don't have a long record of relying on paying an far-higher-than-market dividend to attract investors who would otherwise shun their flat earnings growth.

Investors Chased Yield Because There Was No Alternative

Many writers recommending stocks are still feeding the current obsession with high dividend yields. That's because many retirees chased above-market yields like that of AT&T during the past decade because there was no safer alternative that could generate the income they wanted to earn from their modest portfolios.

It rarely worked out well, which was predictable. Recall the famous investing adage, attributed to Ray DeVoe,

More money has been lost reaching for yield than at the point of a gun.

But by now, after 13 years during which the Federal Reserved in a break with tradition kept its rates below the rate of inflation, a generation of retirees has been brainwashed into thinking that the answer to their income needs is to invest in risky, often obscure, high yield stocks and ETFs. Well, if that was ever true, the emergence of far safer income opportunties, be they Treasuries, Agency Bonds, or Investment Grade Corporate bonds should tell you that era is over.

We are no longer in a bull market. No high yield stock or stock ETF is going to save you now if the market continues on the downward trend so many investors consider to be very likely. For that matter, no stock at all, no matter what you read about its great prospects is likely to improve your financial position in the immediate future.

When Momentum Turns Down Everything Gets Pulled Down With It

Bear markets provide wonderful buying opportunities. But only when they are near their bottom. This one is probably not. Investors' delusion that this latest bear market was going to be another short-lived one like the ones we saw in 2018 or 2020 is slipping away. As I have written in several of my previous articles, inflation matching rates not seen since 1982 is changing the market in ways that very few younger investors can begin to puzzle out. The Fed has made it crystal clear that it won't back down from its current policy of raising rates steeply until inflation nears its target rate of 2% a year. If you are investing money right now, you need to believe them.

Reality is just beginning to sink into the minds of the many investors who assumed that the Fed was bluffing--until their September 21 policy statement and the aggressive dot plot.

September 21 Federal Dot Plot

Fed Dot Plot

Given how much higher the near term dot plots have risen since the last two Fed meetings, it is very likely we will see the projections for 2024 and 2025 rising, too. In any event, the very lowest predicted rate is 2.25 - 3 years from now. A prolonged period of rates above 5% is very possible. Us oldsters remember when 5% was considered an insultingly low rate and 6% mortgages an unobtainable dream. It very well could happen again.

As a result of the shock administered by the latest Dot Plot, levels of the S&P 500 have already been breached that most pundits assured us were not going to fall. As I write the S&P 500 has dropped below 3700 and is well on its way towards reaching the June Low which was 3666.77.

The S&P 500 Heads for 3666

S&P 500 Heads for 3666

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Many investors who only began investing during the long post-Financial Crisis bear market may not realize that when investors realize that a bear market is not going to magically go away and that it might be years until they see their investments return to their previous high, everything tanks. And everything can stay tanked for quite a while.

Nearly All Recently Recommended Great Buys Have Lost Investors Money

Here are charts showing you the performance of several stocks, besides AT&T, which many authors here on SA have recently insisted were great buys. Observe their performance over the past month. They include Microsoft (MSFT), Occidental Petroleum (OXY), Alphabet (GOOGL) (GOOG), Apple (AAPL), Tesla (TSLA), and Palantir (PLTR). They are down, all of them, pulled down by the overall trend of the market, which is what happens to almost all stocks when market momentum turns downwards. There is no need to rush to buy any stock in this kind of highly volatile, unsettled market.

Recently Recommended Stocks Have Declined

Recently Recommended Stocks Have Declined

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Bear Market Buying Opportunities Happen After The Market Has Bottomed Out

The great opportunities offered by a prolonged bear market are those that are bought when a company's earnings are still growing robustly despite the carnage wreaking havoc on other companies. Those kinds of opportunities were available in the years after the Financial Crisis when even the best of the Dividend Aristocrats saw their P/E's plummet to levels of single digits or barely higher despite their continued profitability. But they took a year or more to develop and you didn't miss out if you were patient and waited until the trend began to rise again.

The black line on this graph shows you how Johnson & Johnson's (JNJ) P/E ratio sank to 10.51x in the aftermath of the Financial Crisis of 2008. But notice, that it didn't drop when the crisis began in 2008. It took months of investors realizing that the market was going to be in trouble for a long time for valuations to sink to the levels that generated so much profit for investors.

And note also that investors had years after that frightening 50% bear market occurred in which to make very profitable investments in JNJ and other high quality stocks whose valuations were severely depressed by the collapse of the entire market. There was no need to rush. In fact, if you rushed and bought in December of 2008, your investment suffered a 17% decline before it began to recover.

Johnson & Johnson's Price, P/E and Dividends from 2009 to Now

JNJ Price, Earnings and Dividends 2009 - Now

The lesson you should take from this is that when the market turns really ugly, not "The Fed Will Fix This Sharp Decline Next Month" ugly, you should probably not rush to buy any stock, no matter how good its quality.

When you do buy stocks, you should be buying those high quality stocks whose prices give them P/E ratios well below their usual level.

Right now, that does not describe many quality dividend yielding stocks. Valuations are still very high for current earnings estimates. And those estimates may very well be revised downwards over the next two quarters if a true recession sets in.

Beware Investment "Experts" Telling You "Inflation's Gonna Eat Your Money!"

Inflation is indeed going to eat your money. But it is also eating the value of every dollar you invest in share of a stock or ETF right now. When those share prices, which have already lost buying power due to inflation, just as your cash has, drop the loss suffered by the shareholder is compounded. Inflation decreases the value of cash and all the short-term proxies for cash, like stock shares, when it emerges. It also decreasing the buying power of every dividend you receive. Risky investments won't save you. There is no escaping inflation's ravages.

That's why us old people have feared inflation all these years, despite the fearlessness of younger investors who believed that the Fed had solved the inflation problem. Inflation changes everything about how markets behave.

Yes, stock prices may bounce higher. But over the longer term, your stock shares will only become more valuable if corporate earnings grow at the rate investors expected to see. Inflation damaged the ability of consumers to buy products and services while raising the costs of companies that provide those products and services. Rising rates also make it far more expensive for companies to borrow the money that has fueled so much of the earnings and dividend growth we have seen during the 0% rate years. Inflation, in short, is a huge headwind for the increased earnings growth that is what makes share prices rise in all but the most irrational market environments.

In Times Like This Short Treasuries And CDs Offer A Safe Haven

What we old people also learned was that in times of high inflation fixed income is the safest way to invest. Yes, at today's rates you are still losing buying power to inflation, but you can earn a significant yield, one close to 4% right now and rising daily. And most importantly, you will get your money back, guaranteed, in a few months or years, depending on the term you select. That's certainly not a guaranteed case with stock investments.

Bond Rates As I write on 9/23/2022

Bond Rates Today

I present Vanguard's bond rates as they are available to all without a need to sign into an account. I personally buy bonds at Schwab. Their interface makes it much clearer what you are going to pay to buy a bond and its real rate of return.

When you invest in short term treasuries or CDs you make it possible to preserve the money you currently have for the buying opportunities that will become available when investors capitulate and stop buying stocks on the dips. When the time comes that you can buy Microsoft at a P/E of 15x rather than today's P/E of 25x, it will be a very good buy. If it drops lower than that, as it did in 2008, it will be a far, far better buy. This is true of just about any stock you might consider buying today.

Microsoft Will Be A Good Buy Someday But Not Now

Microsoft Price, P/E, Earnings, and Dividends

Should You Buy Bond ETFs Or Funds

Neither! Bond funds don't work the way many investors think they do. They buy and sell bonds so the investment, whatever its title might suggest, has no date when you can be sure you will get back the principal you invested.

Bond funds and ETFs were not available to investors during the last period of sustained inflation and climbing interest rates for a reason. They are a bad investment during a time of uncontrolled inflation. They only became popular after the great bond bull market began in the mid 1980s.

If you buy a bond ETF or fund, no matter what the stated maturity of the bonds it holds, you will lose money every time that the Fed or market forces raise rates. As the ETF's NAV declines investors flee. And when investors sell out of bond funds, the funds have to sell their bonds, capturing losses. The longer the holding period, the more you will lose.

This has come as a very unpleasant surprise to investors who highly recommended bond ETFs like the Vanguard Total Bond Market ETF (BND) the Vanguard Intermediate Term Bond ETF (BIV), or iShares 20 Plus Year Treasury Bond ETF (TLT). Even investors who bought into recently launched ultra short bond funds like the Vanguard Ultra Short Bond ETF (VUSB) thinking that a short term bond fund would protect them have suffered loss of capital.

Total Return of Popular Bond Funds YTD

Total Return of Popular Bond Funds YTD

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You will hear investors insisting that rising interest payments will make up for you NAV loss, eventually, but this is only true when rates stop rising, and the rate at which Bond ETFs and funds see their monthly payments rise is far slower than you might expect. The SEC yield will be far higher than the distribution yield for months if not years.

Brokerage Money Market Funds Are Another Option

Money market funds pay less than 3 month Treasuries right now, but their yields are climbing in lock step with 3 month Treasuries, albeit there is a lag of a month or so until they catch up. Putting your money into a money market fund gives you the ability to access your money at any time when a true buying opportunity presents itself in the market.

Bottom Line: Don't Be The Greater Fool

When momentum is trending upward, as it has been over the past 12 years, people buy stocks at inflated valuations no matter what their growth prospects or dividend yield might be on the assumption that they can always unload their investment for more than they paid for it to "a greater fool."

But when momentum turns down, the supply of fools becomes tight. Large investment banks and big investors who are sitting on large amounts of declining investments might begin to loudly promote the stocks they need to remove from their portfolios. Don't fall into their trap.

There will be great buying opportunities when the smoke clears, but we are heading into a new kind of market that hasn't been experienced by the past two generations of investors. The Fed has gotten its fingers burned keeping rates down for too long and in every speech given by every Fed speaker over the past month the message has been repeated that the Fed will not be reversing its policy for several years - at best.

So accept that you will lose some money to inflation. If you have been invested in the stock market over the past 13 years you made enough gains to cover those losses. You are just paying now for some of those Fed-Rate-related profits in the past.

Wait for the true buying opportunities that arise in a non-Fed-manipulated market when truly great companies go on sale at prices that correspond to excellent valuations. These are companies earning money from selling products and services to enthusiastic customers, not by paying dividends or manipulating the stock price with debt-funded buybacks.

But in my view investors should hold off from buying anything right now as the market careens downwards, because when the market gets going down fast it takes everything with it with no regard to its price, valuation, or quality.

If you must invest for some reason, be careful to invest only a small amount at monthly intervals to spread out the risk.

This article was written by

Psycho Analyst profile picture
Though I have done quite a few different things over the course of a long life, I am best known as a writer of bestselling books about business and health. My success has come because I am a very curious person who doesn't just follow the herd and trust whatever the experts tell us to believe. I do my own research. I collect the facts, look at them objectively, and draw my own conclusions. Over the years, I have been amazed at how much of what everybody "knows to be true" is based on poorly designed studies, many of them impossible to replicate. I approach Investing with the same open mind, challenging the orthodoxies that attract the herd, studying how things really work, and doing my best to come up with an approach, based on facts, that works for me and would appeal to those who find thinking worthwhile. Lately I have been investigating how the indexes that underlie ETFs are constructed and finding out in the process that the way these indexes are set up guarantees that many of the ETFs people buy are not really doing what their titles suggest they do. I am also doing my best, in the current very challenging environment, to find relatively safe ways to deploy the money I use to generate income, money that I would normally put into CDs. I use valuation concepts and a liberal sprinkling of common sense to find stocks that I believe will not only produce modest amounts of income, but also grow their share price over the next five years.

Disclosure: I/we have a beneficial long position in the shares of VOO, US3M, US6M, US2Y either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a registered investment advisor. I am just an ordinary investor with a lot of curiosity who enjoys researching stocks and sharing what I find with others. Don't buy or sell any security you read about here before doing your own research and considering opposing views.

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