About two weeks ago, I wrote an article about volatility. I was basically explaining that market timing was futile and investing in a high or in a low in the market has a very limited impact.This article was republished on Seeking Alpha. There were several investors over there who were happy to jump on the article to tell me that we were on a verge of a market collapse and that the stupidest move would be to invest at the moment. Their thesis is quite simple (man I should be damned to be so stupid!):
The FED has created the current bullish market since 2009 with quantitative easings;
Chinese market dropped by 50% last year;
The economy is going nowhere;
We are walking on thin clouds and we we will soon wake up;
The market is trading at an all time high…
Source: Ycharts
All right… I get the point, if it’s high, it should go down… logically.
I can’t argue the current PE ratio is not low either:
Source: Ycharts
Based on these two graphs, it doesn’t make sense to invest new money in the stock market today right?
So Let’s SELL NOW… oh wait…
I’ll try to apply the same rationale with the following graph with no dates:
Source: Ycharts
The stock market is clearly up (+74%) and we can see it hits a resistance. On top of that, I can tell you there is very bad news at that time:
Somes countries will go bankrupt in a manner of months;
The banking system is doomed, it’s just not announced yet;
The FED is printing money and they lost control of their machine… it’s going to blow up in their faces!
Yes… we are only back a few years ago in 2012!
If you have listened to the wise advice at that time and sold everything, here’s what you missed:
Source: Ycharts
Interesting isn’t it? I’m not saying the stock market will climb another 60% over the next 4 years, but I want to show you that it’s impossible to time the market. I have yet to find someone who went cash and got back into the stock market over the past 10,15 or 20 years and was always right. If you did this, please share your knowledge with us.
The Answer to All This is Called Dividend Growth Investing
I’m pretty sure you have heard this before, but let’s write it again as I’m convinced many investors haven’t understood this:
Time invested in the market is more important than market timing
If you invest in dividend growth stocks, this time in the market will be super powered by dividend growth. No matter where the stock market will go, sound companies increase their dividend payments year after year. This generates an important source of cash flow and allow you to buy more stocks when the market is down. Here’s the proof:
What you need to succeed on the stock market is not the right timing when investing, it is a strong set of investing rules to make sure you buy the right companies and build a sound portfolio. I’ve built my own 7 investing principles based on economic & academic studies. This set of rules helps me find strong businesses that will increase their dividend payments even throughout the storm. My process also tells me when should I buy or sell them. Hopefully, I will keep most of my holdings forever in order to benefit from the power of compounded income. I think all investors need to establish a clear set of rules that will meet their investing goals. While I can guess that my rules are not for everyone and there are several other ways to succeed on the stock market, but the important part remains that you need an investment process and you will succeed on the stock market.
Saying it will rain someday is obvious and useless, you might as well just get a good raincoat and don’t worry about it!
Makes sense Mike, but just because things are expensive doesn’t mean you need to sell. Coca-Cola is the largest single position in our portfolio, and it’s quite expensive, but I’m not selling it today. If the price went up exponentially I might, but in this case I turned off dividend reinvestment and have just been letting the cash from dividends build.
I also think that global equity markets will reset, adn look forward to them doing so, but I have responded by being more selective in my buying. There are people with a high enough risk tolerance and a long enough time frame that they probably should be dumping fresh capital into the markets….but like anything else, it’s an individual decision.
In other news, I’m looking forward to the post where you guys ride off in the RV. Next month, right?
-Bryan
Hey Bryan,
that’s exactly my point; why people always try to sell because the market goes up or goes down? You should sell stocks when they don’t fit your investment thesis anymore. This is the only reason to sell. Therefore, I agree with you; a company like KO which is not trading at discount right now is not a reason to sell it either. Unless you think KO business model is going bust (that’s everyone decision to make 😉 ).
On the other side, you invest for a long term horizon, it’s always the right time to invest. Imagine people who didn’t invest in 2012 thinking the market was expensive. Now, they have to wait until the market plunge by 50% (which happened only twice in 100 years) to bring back the level of 2012. In the meantime, they also miss important dividend payments. Stay invested, it’s easier and more profitable 🙂
Today is my last day at work, we leave on June 11th… it’s coming!!!
Cheers,
Mike
Very strong article… A good case for DGI… I hope to find the time soon to act upon your email course. In the mean time, I am happy to have my first 3 dividend stocks (one is for sale: KMI). I try to enter the market with put option selling. This way, I avoid buying all the way at the top.
On the other hand, I am far from my FI date, so a serious market correction would be the best thing to happen for me now.
Agreed, I should not wait for it and hope for the 50pct correction.
So, here is my plan/ I invest each month in my index fund, yet less than I can. The rest goes in my opportunity fund to buy DGI stock via options… Let’s see what happens
you can’t go wrong by investing each month! that is probably the best strategy of all 😀
Hey Mike,
Good points and well taken. If we’re individually choosing which stocks to buy, then we can consciously choose not to invest ones that seem expensive and invest in the good value (for the short and long term). So if JNJ looks expensive we avoid, but if at the same time ADM is looking cheap we can buy that.
Even in an ‘expensive’ market, there will be good value hidden in there. There will also be some crap and gems in there too 🙂
Tristan
Hey Tristan,
I guess the idea is to select strong companies. I think that if you look at DIS for example, it has been showing as an expensive stocks for the past 4-5 years. Yet, the stock is up 144% over the past 5 years and dividend payment more than doubled during the same period ($0.60 vs $1.42). Those who wait are the ones who are not making money. After all, who are we to say that company XYZ is expensive or cheap?
Cheers,
Mike
I agree.
I like to think that in an inflated, overpriced stock market, there are always bargains to be had.
The challenge is to find the (relatively) cheap companies.
And that’s where fundamental analysis comes in.
Find low price-to-revenue, low-debt, revenue-growing companies. They have a good chance of being a good buy, even if only in the long run.
Hello Bram,
there were definitely more attractive companies back in 2011-2012 ;-). Today, there are still good buys, but they are rarer!
Cheers,
Mike