What a dunderhead I am sometimes! Just look at my portfolio: It's full of many great blue-chip stocks and growing companies, but I purchased them at the wrong time. For example, as of this writing. I'm:
- Down 28% on Amgen (NASDAQ:AMGN).
- Down 22% on Starbucks (NASDAQ:SBUX).
- Down 16% on Home Depot (NYSE:HD).
- Down 2% on General Electric (NYSE:GE).
- And roughly even on Wal-Mart (NYSE:WMT).
I've owned my GE shares for a little more than a year, and my Wal-Mart shares for about four years. Just think of all that money squandered -- it could have been put to much better use, don't you think? And my losses on the other companies hurt, too -- if Amgen goes up a whopping 20% from here, I'll still be underwater.
Sometimes, I have to remind myself that this is the wrong way to think about things.
After all, no one can really know what a stock is going to do in the short term. So I can't kick myself too much for not having bought at the most perfect time. Short-term volatility is why we recommend that you invest only for the long run in stocks. If I'd parked some down-payment money in Amgen last year, for example, I'd be stuck buying a smaller home, or postponing a purchase.
Philip Durell, lead analyst for our Motley Fool Inside Value investing service, suggests that you deal with volatility by looking for a margin of safety:
The companies we recommend must have excellent management, great assets, strong cash flow, and a competitive advantage. Most importantly, the stock price must be trading at a significant discount to our calculation of intrinsic value. This discount will give us a margin of safety if events don't pan out according to our expectations.
Having a margin of safety won't erase the chance of a loss, but it should keep losses lower than they might be if you bought companies at or above their fair value.
Managing volatility
The best way to deal with volatility in stocks is to expect it and accept it. Heck, make the most of it!
If you want to own piece of a company, and it seems reasonably undervalued, complete your research on it, and then consider just buying it -- without worrying about whether you're timing your purchase perfectly. If you're really worried about a drop in the near future, you might buy it in halves or thirds. In other words, if you plan to spend $6,000 on a stock, you might put $3,000 on it now, and purchase the remainder a few months down the line.
Meanwhile, what should you do if, like me, you already bought some great companies that have fallen in price? Well, if you're confident in the long-term prospects of those companies, you might consider buying more stock in them. You'll lower your average purchase price and position yourself to take advantage of your chosen businesses' inherent strength.
One way I take advantage of market volatility is to keep a watch list of companies that interest me. I'll make up an online portfolio and pretend I bought one share at the stock's price on the day it got added to my list. Whenever I review the list of stocks, I can see at a glance which ones have fallen and risen.
It's tempting to kick myself for missing out on some fast risers, but I can also see some potential bargains. After all, if a company was a decent buy a while back, and it's now trading for 20% less per share, it's probably a much better bargain now -- perhaps even a screaming buy.
Seek undervalued companies
So what should you do now? Look for strong companies that the market is currently undervaluing.
You might use Yahoo! Finance's stock-screening tool to find companies with low price-to-earnings (P/E) ratios, low price-to-earnings-to-growth (PEG) ratios, and strong returns on equity (ROE). I found the research prospects in the table below by running a screen at Morningstar for large-cap value stocks with ROE of at least 15% and a P/E of no more than 20:
|
Company |
ROE |
P/E |
Dividend Yield |
|---|---|---|---|
|
Chevron (NYSE:CVX) |
26% |
10 |
2.6% |
|
DuPont (NYSE:DD) |
29% |
15 |
3.1% |
|
PetroChina |
22% |
11 |
2.1% |
|
Travelers |
18% |
7 |
2.4% |
Source: Morningstar.com.
When your research turns up a strong company that the market has undervalued, consider adding it to your portfolio now, rather than trying to predict where it might be next month. As long as you ultimately sell a stock for a considerably higher price than you bought it for, you'll make a tidy profit -- and whether a stock is currently down probably won't matter to you five years from now.
You can also gather leads of promising companies from a trusted source like the Motley Fool Inside Value investing service. We offer a free 30-day trial, during which time you'll have full access to all past issues and recommendations. You can bet that in this slumping market environment, our Inside Value team is finding lots of great companies trading at attractive prices.
Longtime Fool contributor Selena Maranjian owns shares of Amgen, Starbucks, Home Depot, General Electric, and Wal-Mart. The Motley Fool owns shares of Starbucks. Wal-Mart, Starbucks, and Home Depot are Motley Fool Inside Value recommendations. Starbucks is also a Motley Fool Stock Advisor recommendation. The Motley Fool's disclosure policy is in it for the long haul.
