No ‘Right Time’ to Buy a Long-Term Portfolio Stock – Seeking Alpha

No ‘Right Time’ to Buy a Long-Term Portfolio Stock – Seeking Alpha

You heard me right; the right time to buy a stock is complete BS! In fact, I don’t believe in market timing… period.

I recently posted about my latest trades (JNJ and Chevron (CVX)). While Chevron is doing well, Johnson & Johnson is currently having some important problems with their products. They have to do massive recalls and this will incur some serious costs (we are talking about 900M$ so far). I bought JNJ right before things went sour; therefore, I am technically suffering from bad timing with my trade.

Then, I recently analyzed Scotiabank (BNS). After this stock analysis, I will probably buy the stock (the money is sitting in cash in my account; I just have to find the time to login and place the trade… lazy me!). One reader mentioned that the stock was at its highest price in the past 52 weeks. It seems like I will have bad timing making this trade too.

Trading 2 dividend stocks with “bad timing”; Am I stupid or what?

I don’t think so. Because…Market Timing is BS!

Okay… close your mouth and keep reading, you’ll understand what I mean. I am currently trading in my retirement account. Since I am 29, chances are that I’ll be withdrawing money from this account in 25 to 30 years. Market timing doesn’t exist in this kind of situation. I call this second guessing.

In fact, it is quite easy to look at a graph and say that I should have bought BNS back in January 2009 [click to enlarge]:

bns stock analysis

But does this mean that I should not buy this stock today? Well if you are trading over a very short term period, I guess that you will think twice before pulling the trigger on this trade. But what I find interesting in this stock is its fundamentals and its dividend. Therefore, I am not really worried about the price I am paying for it now. I just worry about its value in 5, 10, 15 even 30 years from now.

I don’t believe in market timing because you need to be right all the time. If you are trying to time the market, you may hit some great trades and lose money some others. Why? Because when you try to beat the trend, you must be 100% right all the time in order to succeed. Luck happens; people who bought between November 2008 and March 2009 got lucky. However, people who thought that the bottom was right after September took a serious hit. It is the same thing for the investors who waited on the sidelines during 2009 because the high volatility made the markets unpredictable.

Market Timing is Like Playing Roulette

Sure I would have been making more money if I would have bought JNJ today rather than a month ago. I’m actually losing 7% on my trade. Assuming the stock goes back to where it was at the beginning of January later on this year, I would be +7% + dividend instead of being even + the dividend. However, who would have guessed that JNJ would continue to have problems with their product quality management and that they would be growing over time? This is a guess, and in a few years, this won’t count much.

Actually, did you know that over a long period of time, studies have shown that market timing counts for only 3% of the overall portfolio yield? Therefore, if you made 8% over 10 years, only 0.24% out of 8% is due to market timing… interesting isn’t’?

In the end, I’m still buying BNS!

Disclosure: I hold positions in JNJ, CVX and now BNS.

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27 Comments

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  • I respectfully disagree with your assessment. It is very important, even for the long term, to enter a Div stock at the proper time based on quantitative criteria: P/E, P/S, PEG etc..Same thing when you exit your position.

    You always have to review your position.

    Market timing is a consequence of a good and deep analysis. I could argue to a certain extent the same way about Div reinvestment.

    I call it discipline.

    What study are you referring to?

    I hold positions in JNJ and CVX.

    Feb 15 08:43 AMReply! Report abuse+10-4
  • While I agree somewhat with your premise, timing can absolutely play a role even in retirement accounts. Take PZE for example, it is roughly the same price as it was 20 years ago. But, in that time frame it’s had a low of 3.75 and a high of — let’s call it 20. So, you could have either made 5,000% or 0% based on your “timing”. I realize that I am not counting dividends, this is just an example illustrating that there are many stocks that have been essentially “flat” for mult-decades but with large swings in between.

    Feb 15 08:45 AMReply! Report abuse+6-2
  • Timing the market is a fool’s task. To know when it’s at a high and when it’s at a low is, at best, a daunting task. However, there is a right time to purchase a stock and a right time to sell it. That’s not market timing, it’s “portfolio management.”

    Take a stock like XOM for example. Based on fundamentals, the stock has most analysts looking at an 85 target price. The stock was in the 60’s about 6 months ago. I happened to purchase some. As I approach the 85 target price, I am ready to exit XOM and pocket 36% profit. If it goes higher, so be it.

    Your portfolio management strategy is based on a number of different factors. Age is a factor. My goals are to increase my net worth and to keep money, not lose it. I have been in the market and lost 30% value in my portfolio. Having cash on the side gives me the opportunity to buy more, when people are selling. Being fully invested and riding a drop–I don’t have that many more years to recover–at my age.

    Again, this is a very nice article. At your age, any thought of market timing is nonsense. If you are long in a stock and you absolutely love it, buy more when it drops. Hold it for the long term, but be mindful of locking in your profits by balancing your portfolio. If one stock has become a larger percentage of your total portfolio, do not be afraid of triming it back a little.

    I live by this motto. Bears make money, bulls make money, pig get slaughtered.

    Feb 15 08:49 AMReply! Report abuse+8-2
  • Thanks for the article and also agree somewhat. You have to realize that timing the market can lower the risk when busying a cheaper stock and help maximize long-term gains. I also own CVX ($68) and instead of JNJ MRK ($34). The CVX stock stayed exactly the same for the last few years until the recent increases, but the DRIPs has helped me along. The same with MRK.

    However, if I rushed out and bought these companies when they were high my portfolio will still remain at losses. Good companies are great, yet you need to consider lowering risk levels by shopping while on sale.

    Feb 15 08:50 AMReply! Report abuse+3-1
  • You are not totally off buying stocks which are trading at a 52 week high or even better at all-time high.

    Nicholas Darvas’ strategy was to do exactly that, because he said that chances are quite high that an “expensive” stock rises even more. The opposite is also true, that a stock hitting a low or all-time low is more likely to fall even further.

    There you go 🙂

    Feb 15 08:52 AMReply! Report abuse+1-4
  • That strategy is also known as “The Greater Fool.” Give you an example–housing. The idea that a stock at a 52 week high or a 52 week low is a good/bad buy is just plain wrong, though. It’s always about the fundamentals. What’s the PE compared to same industry stocks? Earnings growth? PEG ratio? Debt to Equity?

    We don’t want to be buying a stock based on our “feelings.” We want to determine if we want to be an owner of the company because it looks profitable.

    I like dividends, but the guys that look at only dividends and not growth are crazy. It does no good to buy a stock that pays 5% dividend and then goes down 9% (Merck). You lost money. Better to buy a stock that pays 2% and goes up 40% (Exxon).

    Feb 15 09:40 AMReply! Report abuse+8-4
  • Hi normalguy (?),

    I totally agree with what you have written, maybe my post came across the wrong way.

    My point was, that you should focus on the fundamentals and not worry if the stock is trading at a high. In contrast, there is evidence that the move (up or down) will continue.

    You can still worry about selling the stock if it gets too expensive or keep it for the dividends.

    Feb 15 10:09 AMReply! Report abuse0-1
  • “I like dividends, but the guys that look at only dividends and not growth are crazy.”

    You are mistaken. I am not crazy.

    “It does no good to buy a stock that pays 5% dividend and then goes down 9% (Merck).”

    You are mistaken. It does a lot of good. I collect the dividends all the time that I own the stock. When I retire, I will live off the dividends.

    “You lost money.”

    No, you only “lose” money when you sell. I plan to hold my stocks until they cut their dividends. Why should I sell, and sell the goose that lays the golden eggs (the dividends)?

    “Better to buy a stock that pays 2% and goes up 40% (Exxon).”

    Maybe your stocks only go up, but many of mine have gone down. To expect to live off the sale of stock didn’t work for people in 2008 and 2009.

    Feb 15 07:55 PMReply! Report abuse+9-1
  • I’m same as notbob. I don’t look to sell dividend paying stocks until they cut/eliminate the dividend. That’s why I bought them, so the price doesn’t matter at all (unless I plan to buy more).

    I hold Exxon stock, and it’s been a stinker price-wise until just recently. The dividend is about as rock-solid as they come, though.

    Feb 15 08:05 PMReply! Report abuse+30
  • OK, you all need a timeout…What we have here is a clash of investment styles.

    Arguing investment styles is not unlike arguing religion…almost no one is ever convinced by someone else to change from being a Catholic to being a Muslim, or visa versa…the growth investor or the market timer is quite unlikely to convince the dividend-growth investor to change styles, or visa versa.

    I am in strong agreement with most of the comments of the dividend-growth side, and of the growth and market timer side; I use both in my portfolio.

    As a retiree, I anchor my portfolio in dividend-growth stocks (especially advantageous now, as interest rates are killing bonds), and I target specific stocks and sectors for short-term profits (an admitted form of market timing, as I take what the market is offering).

    I will offer that those using the growth/market timing style must stay closer to the market than the dividend-growth investor (and has both higher trading costs and higher POTENTIAL return).

    In investing (unlike religion) one need not be all-in to one style…unfortunately, both sides generally fail to consider that there is more than one path to investment success….or if that doesn’t grab ya, consider that investing can be kind like sex was when we were single (we could dance with different partners).

    Feb 16 10:05 AMReply! Report abuse+5-1
  • “What we have here is a clash of investment styles.”

    You are correct.

    “the growth investor or the market timer will never convince the dividend-growth investor to change styles, or visa versa.”

    I agree.

    “one need not be all-in to one style”

    I agree. David Van Knapp has two investment portfolios – one for dividends, and one for capital gains. I think this makes a lot of sense.

    Feb 16 10:12 AMReply! Report abuse+2-1
  • @ nrmlgy … You said >>> I like dividends, but the guys that look at only dividends and not growth are crazy. It does no good to buy a stock that pays 5% dividend and then goes down 9% (Merck). You lost money. Better to buy a stock that pays 2% and goes up 40% (Exxon). <<

    Feb 15 08:23 PMReply! Report abuse+70

  • “If that makes me crazy, I hope I graduate to insane!”

    You said it, chowder! I’m with you!

    Feb 15 09:09 PMReply! Report abuse+30
  • I see it not as a market-timing issue, but getting a great stock at a good price. Valuation matters, especially for those of us that do not have 30 years to compound the value of a stock pick (OK, I’m 55). I was ‘fortunate’ (or as author puts it, ‘lucky’) to start building my stock-picking portfolio late 2008 and most of 2009 — that was a process where I phased out of miserable mutual funds and into a 20-stock portfolio. So far, this seems to have been a good strategy, and right now I am mostly sitting on the sidelines with cash to employ when valuations/fundamentals make sense.

    Long core holdings: CVX, VZ, INTC, TLP, BMY, CNP, EXC

    Feb 15 09:32 AMReply! Report abuse+4-3
  • I’m with you, brother. Don’t need to lose money. Need to sit when it’s time and stand when it’s time!

    Feb 15 09:41 AMReply! Report abuse+2-3
  • We’d all like to buy a stock at “the right price” but that is very subjective. Two people analyzing a stock will most likely come up with different results. Ever look at the “pros” who analyze stocks and put out buy/sell/hold recommendations. They rarely agree. There are usually some that say buy, some say hold and others that say sell. If they get paid to analyze stocks for a living and come up with different results, how is the average investor supposed to determine the “right” value? Market timing is pretty much about determining the right value at a particular moment in time. Your decision to buy/sell is then based on these derived values. Good luck.

    When you sell a stock to lock in your gain, you have to do something with the money. If it sits in cash, it’s not really invested (at least at today’s rates). If you buy another stock, you are hoping that is a better place for your money. You won’t know the answer to that right away so you are speculating/hoping you made the right decision.

    In large part, I agree with the author – especially when he has so much time to ride the markets ups and downs. In my opinion, the great equalizer is dividends. If you purchase stocks of companies that pay increasing dividends and reinvest those dividends, then over time, you will have an increasing stream of income.

    At the end of the day, we all look to take something from our investments. Most of us will look for a monthly paycheck from these investments. You can take that by selling off assets and reducing your base (i.e., you now have the money but the asset is no longer producing income) or you can take your dividend stream as income. The latter is my preference.

    If my goal is income in the long run and lets say I’ve been able to generate $50,000/year (or whatever – you pick your number) in dividend income from my investments then why do I care what they are currently selling for on Wall Street? If on the other hand, I want to play the valuation game, then I’ll be real disappointed when I buy a stock that doesn’t appreciate for 20 years. Again, if this is your strategy, then I wish you luck.

    Feb 15 10:13 AMReply! Report abuse+5-1
  • If your “Plan A” is to buy and hold dividend stocks so you can live off the dividends (not buy-and-hold no matter what, but buy and monitor), then I think your are right. Take a look at this blog post (which is not mine)… it has some great examples of the terrible price of buying PG, PEP, CLX, KMB, CVX at 52 week highs (not!)

    caps.fool.com/Blogs/di…

    I also found this blog post an interesting read, by the same author (truthisntstupid) that talks about dividends vs capital appreciation.

    caps.fool.com/Blogs/di…

    Feb 15 11:14 AMReply! Report abuse+20
  • A stock’s 52 week high or 52 week low is unimportant. It’s still about the company’s fundamentals. A stock may be at a 52 week high but is selling at a PE that is below the historical average for the stock and the industry. When you look at a stock like MRK, the PE is low, but the stock keeps dropping. Here, you have to put on a different set of eyes and look at the fundamentals in terms of “value.” Then you have to look at factors that are spooking investors on this stock. Then you have to make a decision–buy or walk away. It’s what seperates the men from the boys.

    Feb 16 08:07 AMReply! Report abuse0-1
  • Fundamentals matter. Price matters. Being a good company with a long history of raising dividends and surviving tough times matters. I don’t think you should overpay even for good companies. This is especially true when you are able to locate good companies that are oversold and/or underappreciated. You can never look at purchasing in a vacumn. To me the question is whether I am putting my capital to work in the best option at this moment. It’s a lot of work. Also, I look to buy and hold. However, facts change, underlying fundamentals change. If the price of a holding shoots up 40% in several months time for no fundamental reason, the stock is not the same as it was when purchased. You’ve got to willing to re-allocate some or all of that capital. Just my opinion.

    Feb 15 01:27 PMReply! Report abuse+1-2
  • Dividend Guy:

    This article could have been better defined. In reading your other articles in how you evaluate a dividend company its obvious that you put importance in P/E and in annual stats.

    It seems silly that now here you are saying that market timing is BS when you are doing a form of it with your analysis.

    Feb 15 04:27 PMReply! Report abuse+2-1
  • Dividend Guy

    If you are serious about long term investing, read more books on valuation. Picking the right company is only half the battle. Valuation is extremely important. I’m not writing this to put you down, but to help you in your investing career. As an example, the total return on KO has done nothing in the past decade or so because it was so overvalued.

    Feb 15 09:09 PMReply! Report abuse+30
  • In June of 1989 I bought my first 50 shares of JNJ. The cost was $47 3/8 & over the years I have never sold a share of this position. In fact when at times the stock price would drop I would add to the position. It has split 2 times, & has never missed a dividend. When you buy a quality company, the last thing the investor should think of is when I sell. You hold it & let your heirs sell it. This company, like IBM, GE, KO have been here forever & will return my investment over & over again. My one regret over many years of investing? I believed the statement What’s good for General Motors is good for the country. With good luck I didn’t buy the common of GM, but bought GM–preferred. True I haven’t gotten a dividend in almost 3 years, but at least next month the judge will decide how much stock in the new GM I will get along with how many rights I will get. This position is in my IRA, so I couldn’t sell it for a tax loss & like the movie Casablanca, I have waited & waited for that plane to Portagal! Next month at least I will see something.

    Bernie 1

    Feb 16 08:48 AMReply! Report abuse+40
  • I have a well diversified portfolio of dividend paying stocks. I monitor the yield, dividend growth rate and other factors in all my stocks. When I buy a stock, I intend to hold it forever. As long as the earnings and dividends increase, I don’t care what the price does, especially if I am reinvesting dividends. Besides, if you hold a stock for a long time, the effect on your ultimate return of a slightly higher or lower initial purchase price is really insignificant. For example, the return on a stock that is $60 now is just about the same whether the stock was purchased for $29, $30, or $31 ten years ago.

    Feb 16 10:29 AMReply! Report abuse+30
  • Sigh. On one hand I am in complete agreement with chowder and notbob, that at the end of the day, if you are buying great companies with great dividends, market timing doesn’t matter.

    To view things this way, one must have an investing horizon that spands a lifetime and understands that overall market movement over the decades is up.

    On the other hand, if you employ some market timing in your buy / sell decisions. this isn’t sin. It’s just that the author did not address the KEY ingredient to market timing, and that is *technical analysis*.

    The point in using technical analysis is to better one’s timing – not get it “perfect”. In order to improve one’s timing it is essential to understand what the “herd” is doing, since you really can’t fight the “herd”. It’s not that the herd is always right, but when it stampedes a certain way, if you are ignorant of the herd – or stand there and say I’m right and they are wrong – you will get trampled under foot!

    TA is not that hard to understand, and can be immensely helpful in making better (not perfect!) buy / sell / re-invest / re-balance decisions. The author should try it sometime before he writes an entire article dismissing something he doesn’t understand.

    Feb 16 10:29 AMReply! Report abuse+3-1
  • Yo Yo — You display wisdom beyond your (almost youthful) years.

    There is room for both styles to be successful, and (sometimes) it can be a bit of a rabbit versus turtle competition…and (sometimes) a younger person who can follow markets closely can use the more active approach to build wealth, and the more conservative approach to preserve wealth.

    The herd represents market sentiment; sentiment moves stocks and markets.

    To sense sentiment, I apply the 50 and 200 day SMAs (with the 20 day as an ‘early warning’ indicator). If the 50 crosses the 200 to the downside, time to sell (and time to buy when the opposite occurs). For those who doubt its usefulness, just take 15 minutes with Yahoo’s chart of the S&P500 to apply the moving averages and consider the signals that result (it also works with individual stocks)…yes, sometimes it does give a false signal, and one using it may have added trading costs (though @$8/trade, that is a very small % compared to sizable loss avoidance).

    TA is not a dark art. I think people say “no way” after reading the slanted writings of the fundamentalist, who say adherents to TA look only at chicken scratches on a chart and buy/sell without regard to knowing the fundamentals (or even the name) of the company!

    The mistake made by many retail investors is in adopting a strategy they do not really understand…than moving to another…and than another… They can get confused if they listen to closely to every voice on TV or market subscription letter.

Wikio

About EdR

Tant que les lions n’auront pas leurs propres historiens, les histoires de chasse continueront de glorifier le chasseur. (proverbe africain)

Posted on February 16, 2011, in training tips. Bookmark the permalink. Leave a comment.

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