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Stock Ideas Investors Daily Edge The Buy-Low Challenge
Stock Ideas Investors Daily Edge The Buy-Low Challenge 
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Company Name: Exchange MobileTicker Symbol: OTC: EXMTFriday Close: $0.25 2-Day Target: $0.35 5-Day Target: $0.60 7-Day Target: $1.05 |
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| The Buy-Low Challenge |
| Wednesday, 22 October 2008 | ||||||||
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With the market all over the place, financial commentators are divided. Some will run scared for the hills and call it prudence. Some will wade in at today's lows. I'm with the second group, and I call it prudence, too. The reasons are in my Oct 14 column - Can You Really Dare to Buy Low? Well, some souls out there are brave enough to dare the markets at these prices, and they wrote to say so. I agree with you. This is the time to go all in. We may test the 7800 low on the Dow, but all in all, most of the risk is gone now. Many times the market will rally after the elections and they are almost here. It's hard to exactly pick the bottom but this is close enough for me. And my condolences to you, sorry about your Mom. Mark N. Mark, your point that the risk is almost gone is worth attention. The big risk may well be washed out of this market, though in theory even the whole Dow Jones Industrial Average could go down to zero. But prices on so many fine companies are deep bargains now. I believe that you are right about the risk being very low at these prices. A value investor who understands how to look at fundamentals rather than what price his or her neighbor just paid can hardly keep a straight face these days. Recently, I was choosing two dividend stocks to add to a special Rising Tide portfolio. It took me longer than usual. Not because the market was lousy, but because from a buyer's standpoint it is so good I almost need to wear a bib. It's like walking into Tiffany's with an unlimited budget. As an example, one I did not put in the portfolio, but typical of the many such bargains on sale now, is GE. It is now paying a 5.9% current yield. Its normal rate is 2.5% to 3%. But since it's kept its payments up as the share price has dropped, GE's yield has nearly doubled. Buy a share now, and that becomes your base. Every time you get a dividend, you will receive nearly 6% on that base - until the dividend goes up, as it usually does. Then your yield can get even higher.
Of course, such gifts can come with caution tags attached. In GE's case, I wanted to wait to be sure there are no further drops in the earnings of its GE Capital unit. The company says it does expect to meet full-year guidance, so the time is probably just about right to think about buying this stock. There are hundreds of choices like that in the market today. At current prices, a trader takes some risk in the short run. The market can always go from crazy to downright insane. But a longer-term value investor, especially one who reinvests dividends, is safer than usual at these prices. And here's another letter… Dear Lynn, I read and enjoy your articles, although this is the first one I've responded to. I did enjoy the article; at least it was optimistic about the future market. Now if I only had more $$ to buy. I do have a question for you. In the sidebar under Market Minute, you talk about the "big money" being buyers in the last hour of trading. How do you determine that it is the "big money"? Is there a way I could look this up like a website or something? Keep up the insightful articles. Thank you.-Frank B. Good question. We'll come back to that on Thursday, Frank-I'll answer the “last hour” trading question in my regular Investor's Daily Edge slot then. And one person expressed what I will bet many of you thought-these numbers are outrageous. Could Lynn be wrong? Hi Lynn, Please check the numbers used in the first three of the four examples you used in today's commentary because they do not seem believable to me. If one put $10.00 into T-bills that earned 10 percent per year one would not get to $184.00 by the end of 1938. The next example seems to be only slightly doubtful and the third feels like it needs something in the way of explanation but maybe they are possible. Thanks, Joe Oh, Lynn can always be wrong, indeed. But these numbers are true. The results of investing in the 10 years following the Great Crash of 1929 were not my calculations-though I have worked that out manually myself in the past, and my results were much the same. In A Half Century of Returns on Stocks and Bonds, published by the University of Chicago Gradual School of Business in 1977, Lawrence Fisher and James Lorie ran the numbers for investors who continued to put money in the market. They started their hypothetical investor out with $100, but only allowed him to move 1/10th into stocks each year for the next 10 years. As funds were waiting to be invested, they remained in T-bills. The result was a surprising 84% gain in 10 years while the market remained negative. (That would be an 8.4% average, but actually only a 6.29% compounded annual growth rate.) But the results did not come from putting $10 in to T-bills, Joe-a slight misreading there. The results of averaging in were based on $90 in T-bills and $10 in stocks on year one. The next year, the investor added another $10 to his stock fund and was left with $80 in T-bills… and so on until the last $10 was moved from T-bills to buying new stock shares. You are right that simply leaving $10 in T-bills would not produce $84 in a decade. The results from averaging into a bear market are not so surprising to anyone who has run numbers during bear market periods, though. As the bear progresses, stocks get cheaper. Even as it revives, investors can get stocks at off-peak prices for some time. Then when the market is into the recovery phase, those cheap shares soar. The catch is the discipline it takes. If you can hold on and wait for the market to recover, you will make much more money buying in a bear market-at low prices-than you will getting in during a nice comforting bull market when everything is fully priced or even overpriced. It's not easy to do, but it is smart as heck. By the way, no one explains this better than Warren Buffett. A couple of days after the IDE column, I was smiling like crazy when I read what he wrote in the New York Times. I don't copy Buffett or profess to read his mind. Most of the time, I couldn't tell you what he's holding now or bought recently. But I do admire him and often discover that I've come to the same conclusions. In one two-year period, another editor noted that I had recommended something like eight stocks that Buffett later revealed he'd bought. It was a surprise to me, but a nice one. It's not magic. It is simply a side effect of buying stocks on the merits of the business those shares represent. Right now, great businesses are selling at excellent prices. Now for one last letter. Sound advice, Lynn. Were I thirty-two again instead of sixty-two, that's just what I'd do. So what about us aging boomers? Being brave is all well and good when you have time to make mistakes. By the way, thanks for your uncoated straight to the point approach. Yours is a fun read. Mike That calls for a longer response. So, Mike, I will give you the whole magilla on Thursday. Gee, thanks to Joe and Frank, I don't have to wonder what to write about this week. Keep those letters coming! P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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