What's Up?
A whole lot or a whole lotta nuthin'?
by Jeff Fischer ([email protected])
Chicago, IL (August 31, 1998) --Stocks of leading companies are falling several dollars per day. If you aim to continue investing more money over the years, you might watch the decline with interest and even some glee. As stocks fall, you probably think of sending significantly more money to your investments this month and next month, too. In fact, perhaps you'll send as much money as you possibly can.
But, as is said in the movies, "Hang on a minute there, cowboy."
If you're investing with at least a five-year outlook, there are plenty of months ahead to dollar-cost-average into your investments. Although it does make sense to invest more money when the stocks of your favorite companies drop, don't view this initial slide in prices as the ultimate and only opportunity.
The first sizeable stock market decline in several years probably shouldn't cause a person to send all of their emergency savings to their investments this month alone. This slip could be just the tip of an iceberg in what becomes a slow, drawn out avalanche of declining prices and ever-increasing opportunities. So, take your time... a dividend reinvestment Fool might invest more money than usual when prices decline, but they probably won't invest the entire farm on the first large downdraft.
Today's decline was severe enough that NBC interrupted its regular broadcast to share word of the stock market's fall. The Nasdaq lost 8.6% to begin the week. This follows an 8% decline last week. The S&P 500 declined 6.7%. The respective indices are about 25% and 19% below their highs, and are now in negative territory for the year. What's up? We'll touch on that in a minute. First, for investors who plan to buy more stock than they plan to sell over the years, this decline is actually good. In fact, if we're lucky, we might see stock prices 40% below current levels.
Like many Foolish investors, the Drip Port represents new money in the stock market. It's so new that the portfolio only has 6% of its planned savings invested ($1,500 is invested of an eventual $24,500). Logically, we welcome the prospect of lower prices at which to invest the other 93% of our savings over the years. Lower buy prices grants us higher dividend yields (this alone assures us much better total returns in this respect) and also allows for the possibility of stronger capital appreciation in the share price over time.
We're buying the same strong companies but at lower prices. It's about that simple. Sure, our companies might not be as profitable near-term as they otherwise could be due to a weaker world economy for a number of years, but there's nothing that we can do about that. The trade-off for slower business growth is that we're able to buy stock at a lower price (and with a higher dividend yield, in our case). This isn't a horrible trade-off. At all.
With every check that we send, we're still buying the same great businesses, the same sales teams and distribution channels, the same leading managements, and the same products and future prospects -- all of this -- but, because our companies face a less certain near-term future, we pay a lower price for the whole shebang. We're not receiving any less "company" for our investment dollar, only less certain near-term results. Meanwhile, the higher dividend yield that we're given works as a sort of "payment" for accepting this uncertainty. This is part of the premise on which the high-yielding Foolish Four investment approach works.
But what's up? Why is the market "down sharply," as the media reports? (For perspective, the Dow is now where it was in January of this year.)
There are several factors working together. The first is most interesting. We haven't heard two words about Russia while it struggled for the past eight years to rebuild itself with an open economy. Now, suddenly, this somewhat isolated trek of land called Russia, which constitutes less of our nation's gross national product than does Holland, is destroying our stock market? Not likely.
It's a good excuse to sell stocks, though. The fact that Russia's lame attempt to reinvent itself is not working is now reason to panic, according to Wall Street "investors." It serves to point out that the problem was that Russia never committed to complete change. Like an investor who won't commit to being long-term, this leaves no option but to fail. You can't "half commit."
Asia was enough of an excuse to sell stock last fall, and Asia has been in the background like a shadow all year, but the stock market needed something new to scare it into selling. Russia, of all things, has suddenly been elevated to the status of "important" for the U.S. economy and stock market. When you look at the numbers, though, that just doesn't make sense. Russia is a fly on the giant elephant of progress represented by the United States.
Another catalyst behind the decline is that corporate earnings actually fell 1.5% last quarter, as the Commerce Department reported last week. The drop in earnings resulted from lower sales overseas (mainly Asia), and lower selling prices. Some even claim that deflation is appearing. Oil is selling 34% below its peak, Gasoline 20%. Personal Computers (PCs) -- 25%. Yes, technology has a big hand in the decline of PC prices. It also has a hand in this country's increased efficiency industry-wide, which results in lower prices and therefore lower corporate earnings if sales aren't booming.
Add these factors together, plus the fact that the S&P is up 20% annualized each of the past four years and was at a historically high multiple to earnings, and perhaps it's time for the stock market to decline. Well, now it has. Perhaps it'll decline more. Perhaps not. Who knows? Addressing the market when it declines but not when it rises is Wise. We don't report on every fat gain in the market on a daily basis, and we won't report on every sharp decline, either. It's all irrelevant to a truly long-term investor.
Our time would have been better spent today studying a business. After all, we're investing in businesses, not the stock market as a whole. We learn about our companies' businesses and evaluate their valuations. (In a declining market, you see how valuation matters more.) We invest in what we know -- and we don't bet on short-term companies.
We of course want to understand the macro situation that is Wall Street, but not focus on it -- nor make "guess" decisions based on it. Instead, we invest in and focus on companies. So, back to Foolishness now!
Tomorrow we'll begin to review Norwest (NYSE: NOB). Norwest is Dale's top pick for a Drip Port financial stock. To prepare, a Fool should read or re-read the past Norwest articles. We'll all be on the same page then. They're listed in the Drip Port's past reports. Dale wrote about Norwest on 6/15, 6/16, 6/17, 7/16, 7/17, and 7/30. Some of the columns include Wells Fargo (NYSE: WFC), Norwest's potential partner.
Have a Foolish evening!
--Jeff Fischer
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