Is Now The Time To Buy? A Follow-Up

Includes: C, MCD
by: Larry Smith

Two weeks ago, I wrote an article that I titled, "Now is the Time to Buy - Then Again, Maybe Not." My premise for the article was that stock prices pull back for various reasons, and that some pull-backs present buying opportunities and some do not. Because the overall market had been in decline for weeks, I thought I would end the article by stating whether I thought that time was a good time to buy or not. I stated that if you had a long time frame, yes it was a good time to buy dividend growth stocks, and gave the fundamental reason why.

What happened after I submitted the article surprised me. The SA editors changed the title to "Is Now a Good Time to Buy?" and the article received the most page views of any article I wrote, as well as precipitating a discussion on whether now, was in fact, a good time to buy. As I mentioned earlier, I did not intend for the article to be a market timing call, simply put, I do not believe in market timing.

In reviewing the article and the comments, I thought it would be interesting to review some of the comments that were made, as I think it proves that individual investors should not try to time markets, because no one can predict where the market is going. I will not mention the name of the person who made the comment; I'll just post the comment in bold and then provide my opinion.

How do folks relate to the idea that once an index or a stock falls through its 200-day-moving average, that significant further downside is in the offing?

I do not believe 50 day and/or 200 day moving averages tell you where the market is headed in the future. In this case, the market broke through the moving average on Friday, but was right back above the moving average the following week. Had a person said, wow, we broke through the moving average, and we are headed lower, they would have been wrong. Stocks breaking through the moving averages tell you that market (or individual stock) is currently weak at that moment in time. The market right now is news sensitive, when it hears good news from Europe, or some economic report has better than expected news, the market moves up, and when the news is bad, it moves down. In my opinion, it is far better to buy stocks based on long-term business fundamentals, than a short-term technical indicator.

The trading strategy when using the Daily 200ma as a Potential Support is to wait for a bounce off the support (minor penetration is expected most times to shake out the weak hands). That means SP500 will have to close above 1284 today (Friday, June 1) in order for savvy traders to start buying if a rally happens Monday.

The S&P 500 did not close above 1284 on that day (Friday, June 1), it closed at 1278. Yet, the market rallied the following week. As a dividend growth investor, all of this technical chart talk should mean nothing to you. As a dividend growth investor, what you want is a solid company that has a strong balance sheet, has growing dividends, and is priced at a good entry point, or at a good price to add to your holdings. Close your ears to all the talk about moving averages, death crosses and other various technical indicators. If you own good businesses and you buy that business at a good entry point, you will do well over time.

If by "now is the time to buy" you meant, "now is the time to sell everything and your grandmother and run far away into the hills", you are dead on brother. Absolutely correct! Even the biggest market amateur should be able to tell that the S&P500 will get back into the low 1200s before any kind of serious upswing can resume.

I have been investing for over 40 years, and for all of those 40 years, when I have heard doomsayers predict market calamity, it has almost never occurred. Yes, we have had a few crashes, but the funny thing about those crashes is that the market always came back. An investor who panicked and sold may have lost money, and the investor who held on and maybe added did just fine. Ignore gloom and doomsters, especially those with a condescending tone. It makes for nice headlines, but is almost always wrong. Had I listened to the "sky is falling crowd," I would never had invested in McDonald's (NYSE:MCD) on January 31, 2008 for $50.23. I would not have invested in Exxon Mobil (NYSE:XOM) in 2004, for an average price of $45.50, and then sold it May 12, 2008, for $88.83. When XOM sank in price, I started buying it back again, and currently have an average price of $65.44 on it. I do not use these examples to show every investment I make is a success, they are not. I mention this so you know you should not let fear keep you out of the market. With the right approach, you can make money in the stock market.

Larry, my biggest concern right now is that we are faced here and in Europe with some truly massive, complex problems, and I don't have a shred of confidence that any politician, or Governmental agency, here or abroad, is equipped with the knowledge or ability to prevent massive damage.
Generally, I am an optimist, and this is a rare stance for me, but it looks like a housing crisis/ Lehman level here.

The commentator makes a valid point; the economies of many of the world's leading nations are in trouble. High debt levels, high unemployment, and aging populations are combining to create severe budget crunches for many countries. But, while some countries are slowing, other economies are growing. While mature countries with aging populations struggle, young countries with youthful vibrant populations are growing, anxious to have the life and conveniences previously unattainable. What this means to the dividend growth investor is that the multi-national companies that make up much (not all) of the dividend growth universe of stocks will continue to grow. These companies have scale that is difficult to replicate, which provides them a wide moat against competition. As new consumers in Africa, Asia, South America, etc. are developed, Coca Cola (NYSE:KO) will be there to hand them a drink, Johnson and Johnson (NYSE:JNJ) will be there to ease their pain, Procter and Gamble (NYSE:PG) will be there to provide a laundry product to make their lives easier. These companies will continue to provide products to a world population that is expected to grow to 10 billion people by 2050. The world's problems are real, but I believe they will be resolved, and mankind will continue to evolve and grow just as it always has.

"The trend is your friend until the bend at the end." The trend is down, don't try and catch a falling knife. Don't tell me stocks are cheap when they're only 10-15X earnings after the biggest money printing exercise the world has ever seen. Wake me up when they're 6-8X earnings, like plenty of other bear market bottoms. Then I will buy with both fists. I loved Citi at $4 in 2009. Patience, folks.

I found the above comment humorous, in that the individual throws out a couple cliches we have all heard, then talks about waiting until stocks sell for 6 to 8 times earnings and closes by mentioning he loved Citigroup (NYSE:C) at $4.00 in 2009. Assuming that when he "loved" Citigroup in 2009 he actually bought some, he has lost money. On a split-adjusted basis (Citi did a reverse 10 for 1 spilt) Citigroup now sells for $2.67, a loss off 34%.

Many people like to prognosticate about the market, including me. As investors, we have to learn who to listen to and who to ignore (like the individual who made the above remark). In the investment world, I like to listen to Warren Buffett, Julian Robertson, and Don Yacktman. On Seeking Alpha, there are authors who I always read and some I ignore. This is the information age, and there is a lot of information available, not all of it is accurate or good. Look for someone who has a proven record, look for someone that does not change with the wind, look for someone that admits they make mistakes and look for someone with the same investment view as you. Use the people you follow as a source for clues, clues to possible investment opportunities. Those clues are just the start, then always do your own research to see if the opportunity fits your goals, your financial situation and your investment plan. If it doesn't, don't worry, another investment opportunity is always around the corner.


My original article was published on Friday June 1st, when the market had just finished a big down day and down week, The market had officially entered correction territory, and many people predicted things were going to get worse, but it did not. We followed up that week with one of the best weeks of the year. This week, the market has bounced up and down based on the economic news of the day. If you are a trader, short-tern market gyrations are important to you; if you are a dividend growth investor it should not matter other than to provide buying opportunities.

I tend to write about McDonald's a lot, but that is because it has performed about as well as a dividend growth stock could perform. As I mentioned, I bought it in January 2008 for $50.23. it now sells for $89.18, and yields 3.19%. When I first bought the stock, it paid a yearly dividend of $1.50; four years, later it pays $2.80, an increase of 87%. The payment of dividends has increased my overall return by 11%. This is the type of stock dividend growth investors look for, strong business, wide moat, and a growing dividend, which should continue for years.

Now think about all that has happened in the political world and/or in the financial world since I bought McDonald's in January 2008. Think of the financial crisis, the flash crash etc. Think about how many times some forecaster predicted the market was headed up or headed down. None of that has mattered; McDonald's continued to sell food and beverages, continued to expand, continued to increase their cash flow and increase their dividend.

The same scenario can be described about other dividend growth stocks. Growing businesses, growing profits and growing dividends usually results in nice returns for investors. Market forecasting is fun, but no one has ever been able to consistently predict the direction of the market, and no one ever will. Ignore all the predictions about market direction; remember, you have invested in shares of a business, not made a bet on market direction. Up markets and down markets come and go, but outstanding businesses stand the test of time. Invest in outstanding businesses and then let time and rising dividends work for you.

Disclosure: I am long (MCD), (XOM), (KO).