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"How well you do depends not on how you do in normal markets, but on how you act when the storm breaks."
-- William Bernstein, author, Investor's Manifesto
In a down market, investors get illogical -- they tend to sell low after they've already bought high. Fear takes over the rational part of our brain; after all, the financial mess of 2008 isn't all that far behind us. But it's at times like this, when the overall market is already down 10%, that you have to be steadfast in your resolve and act accordingly when the storm actually breaks.
Two quick examples
Remember two years ago, when all hell was breaking loose? Investors were pulling out money quicker than the Eagles could trade Donovan McNabb.
Probably some of the most worried people out there were investors in Sirius XM (Nasdaq: SIRI ) and Las Vegas Sands (NYSE: LVS ) . Sirius saw its share price drop to a devastatingly low $0.06 per share, as onlookers felt the technology was obsolete, losses were looming, and the company was bound for bankruptcy. Since then, however, Sirius has seen its subscriber count skyrocket, and it now expects to add 1.1 million net subscribers in 2010. It has also reported breakeven results after years of losses, and has repositioned itself with the help of the auto industry. Investors who believed in the original thesis of Sirius XM and refused to sell have seen a 144% gain in the past year.
Considering the Great Recession and the rapid rise in unemployment, it was natural to see stocks drop that depend on discretionary spending. Vegas revenues were hitting rock bottom, and almost all of the gambling companies were getting hammered. But in particular, Las Vegas Sands saw its stock lose nearly all of its value! Considering the company has the most exposure to Macau, the Mecca of Asian gambling, and has upcoming operations in Singapore as well, the company is actually pretty diversified. Those investors that were able to keep their heads on straight and realize that even gamblers would come out of their holes were well-rewarded -- the stock has skyrocketed by 138% in the past 12 months.
So what's the lesson here?
Don't sell out of fear. Believe in your thesis. Stay calm.
It's time to get defensive
Right now happens to be a unique time. Not only is the market down, but in the race to sell off just about everything, hundreds of blue chips have taken a beating. Tech stocks, for instance, are trading for insanely low valuations compared to their historical prices. But so are a handful of other relatively safe companies that are worth scooping up, especially given their defensive nature, high dividends, and low price-to-earnings multiples.
- Altria (NYSE: MO ) and Procter & Gamble (NYSE: PG ) are some of the most recession-proof companies out there today. Marlboro Brands has a 40%-plus and growing market share in the U.S. cigarette market, and no matter how high taxes go, smokers keep smoking. Selling everything from Bounty paper towels to Duracell batteries, P&G pretty much has the lock down on consumer products. These are two businesses that trade below their five-year historical earnings multiples, generate billions in free cash flow, and have been paying dividends for well over 50 years.
- If you're close to retirement, or just need some additional income in your portfolio, here's two great ways to take advantage of massive dividends: master limited partnership Enterprise Products Partners (NYSE: EPD ) , and diversified REIT Annaly Capital Management (NYSE: NLY ) . Enterprise pays a dividend of 6.1% and has increased its payout 11 years in a row. In addition, if you're worried about inflation, Enterprise helps offer cover by providing you with energy exposure and a great yield. Annaly Capital has aggressively grown its dividend payout since 2006 and currently pays a whopping 15.5%. With interest rates at historic lows, Annaly seems set to continue raking in big profits.
- It's almost too hard to ignore this tech titan: IBM (NYSE: IBM ) . A 2% dividend is nothing to write home about, but check out these stats: It's trading at 10 times next year's earnings, it has achieved record profits in one of the most difficult business environments in decades, and this week it once again reported a boost in earnings and margins. Did I mention the stock is wildly undervalued?
Don't miss out
This weekend, a family member flat-out told me, "I'm too scared to invest in the market. We lost too much in 2008."
I can empathize with that sentiment. Investors who have been bruised and beaten by the last few years are going to have a tough time getting back in the game.
But if you own stocks right now -- stocks that could possibly be down 10%, 15%, 20% -- remember to stay cool and evaluate whether your main thesis has actually changed. If it hasn't, then selling should be your last option. And if you have some money to actually invest, take a hard look at the stocks above; they offer deep value, consistent income, and an almost uncanny ability to weather even the roughest storm.