Contrary Indicator?

[EricL]

People have been calling for a market top for a few years now and the market keeps piling higher. Valuation wise it doesn't really look very overpriced either. Now is not the time to buy the high-multiple growth stocks like TSLA, NFLX, UA, AMZN, etc., but I have no problem continuing to buy high quality, above average yielding companies at decent prices to continue the compounding machine going.

Large cap tech and oil companies both look like the cheap sectors to me, along with maybe some consumer discretionary and a few of the REIT's.

[Dividend Watcher]

(06-01-2014, 05:27 PM)Kerim Wrote:

(06-01-2014, 04:38 PM)daat99 Wrote: My worst fear is that I'll put all my money into new portfolio just to get it cut in half in a month time because a bear market just started.

For now, I prefer sitting on the side and wait for the bear market to show its ugly head first.

I don't blame you at all, daat. But just to play devil's advocate (and perhaps to completely contradict myself), a lot of people rightly believe that time IN the market is far more important than timING the market. The idea is that even if valuations are high right now, you are still missing out on dividends and growth in the meantime -- there is a real cost to waiting. And, we may NOT be on the verge of a big decline. Nobody at all can predict where we are headed from here. Here's an article that notes that on an inflation-adjusted basis, the S&P is not at all-time highs after all.
... <snip> ...
Maybe the best approach would be to develop a plan to very gradually ease into the market, so that you are not fully exposed quickly, but you still get some of your money working for you?

I tend to agree with Kerim here.

daat, I don't know anything about you or your background so what I say may be totally off-base. Maybe you mentioned it someplace else but you ought to introduce yourself in the "Introductions" section so comments can be pertinent. In the meantime, I'll add my 2 cents.

First off, I don't think the market is crazy here. Sure, fair to a little overvalued but we've been here before. These levels could be sustained for quite a while. You're not seeing things like KO, PEP, MMM, etc. with a P/E north of 30 or even higher. Most importantly, you don't see people touting these stalwart companies as great deals at these levels like they were in the late-90's.

Secondly, I don't think you're seeing major companies in boom production cycles. Hiring and it's growth has been tepid, production cycles seem to have been muted and M&A, although active, hasn't been willy-nilly at outrageous valuations. You see more of this prior to a real bear market.

To me it seems part of the resurgence of profitability has been due to financial engineering as much as from sales and end-user demand. Companies have cut costs, refinanced debt at lower rates and jettisoned unprofitable product lines.

That being said, I wouldn't say this is an opportune time to establish a major portion of your dividend growth portfolio. However, as I'm one of those believers that time in the market is one facet of building wealth and an adequate income stream, I wouldn't sit on the sidelines close to 100% in cash.

Perhaps buying small starter positions in great companies would start the ball rolling. Aflac (AFL) seems a little undervalued to me here, Johnson & Johnson (JNJ) is fairly to a little overvalued here but still yielding 2.8%. Coke (KO) is still yielding around 3% here and not grossly overvalued. Chevron (CVX) seems fairly valued here and is yielding 3.5%. You get my gist. Dropping $1,000 or two (depending on what you have) on each here may be a good start to a great portfolio and get the compounding machine rolling. Then, when we do get a correction (or a bear market), you can buy bigger portions of these great companies to bring your cost basis lower. If you don't like these, choose some others.

Yes, I'm sitting with some cash with low-ball limit orders but that amount is only about 3% of my overall portfolio. I'm also still re-investing all dividends in their respective companies.

A bear market could take several years to get here, or it could start tomorrow. No one really knows. Living in fear of a mistake is no way to live.

(06-01-2014, 05:39 PM)Ok Red Wrote: I have established my initial positions - currently about 16% of my portfolio. I have 50% in cash ready to invest and will just wait until the inevitable correction. It's killing me to have that much cash, but after living through multiple downturns I know I have to be patient. The real question will be how to spot the bottom, or the approximate bottom. 20%? 40%? 50%? Who knows....

That is what I was referring to above. Sounds like sound logic to me.

Who does know where the bottom would be? I certainly don't. Perhaps buy a little with a 5% dip, some at 10% discount and a bunch more at 20-30% sale prices if we get there.

I was buying on the way down in 2008-9 and again in the 2011 swoon. Sure, most of my portfolios were in the red for a while but, as usual with large companies that have survived WWII, Korea, Viet Nam, the oil shocks in the early 70's, high inflation in the 70's-80's, double-digit interest rates when Volcker broke inflation's back, the dot.com bust and the Great Recession, they came back and still paid a dividend.

Maybe I'm too optimistic ...

"Would you like a shopping cart?"

---

Don't know how I missed this. Must be my browser cache didn't update before I started writing my first reply.

(06-01-2014, 11:57 PM)daat99 Wrote: The way I see it is that there are too many experienced traders screaming 'it's going to blow" while too many newbies rush into the market.

[Emphasis mine.] Are you a trader or investor? Traders, by their own methodology, need to be in or out at the right times or they can get eaten alive.

(06-01-2014, 11:57 PM)daat99 Wrote: I can't shake the story I heard about a guy (you probably know who he is, I don't recall his name) who sold everything he had because the person that was shining his shoes started to give him stock advice just before one of the major market drops.

This story has been around since the Great Depression in the 1920's. Got any recent details?

I dunno, maybe I'm full of $%#! but I'm more optimistic.

[ChadR]

I agree with Kermin and Dividend Watcher. Being a DGI, valuations aren't the end all for me. A 20%-40% drop won't cause me to lose any sleep at night as long as the dividends aren't cut or eliminated. I'm currently 100% invested (not entirely 100% since I have around $400 in cash waiting to add more to it so that I can buy some more stock) and keep reinvesting my dividends into the stock that paid the dividend. To me having cash sitting in my account means missed dividend payments. And no matter what level the market is at, you will always have people saying it is about to crash or fall even further. When the market hit it's lowest point, you still had people saying it was going to fall even further. I've realized that if I listen to the naysayers, I would never buy stock because the next big crash is right around the corner and when it is crashing it will go even lower.

There are still lots of good deals out there today. Start buying because you can never get back the last dividend that you missed.

[Dividend Watcher]

I found this interesting over on Morningstar. I've bolded the salient parts. Seems many are feeling the same thing. Is that good or bad?

The rally in U.S. markets over the past five-plus years has not only led to a more than 150% increase in the value of the S&P 500 TR Index (from the depths of its lows during the first week of March 2009). It also has left many of our Ultimate Stock-Pickers bereft of ideas about where to put new money to work. As we noted in our last article, the first quarter (and early second quarter) of 2014 was one of the weakest buying environments we have seen since we relaunched the Ultimate Stock-Pickers concept in April 2009. The trend toward fewer and fewer meaningful purchases by our top managers started midway through last year, with the buying activity we were seeing being much more notable for its breadth than for its level of conviction. With many of our managers taking advantage of the run-up in the markets to trim or exit positions that they think have become fully valued, some have opted to funnel the cash back into names that were already held in their portfolios (especially where there is a perceived relative discount to the market).

Maybe TomK is right.

[daat99]

I'm confused

Allow me to to present 2 scenarios which I think are likely:

Let's assume the market will rise another 5% and then fall 10% in 6 months (which I think is realistic)

Scenario 1:
I purchase stocks worth of $10,000 in companies with yearly dividends of 3% today and growth potential.
During the next 6 months the stocks rise for 5% to (10,000+500=) $10,500 and I receive dividends of 1.5% totaling $150.
After 12 months the stock market dives the 10% and my stocks are worth (10,500-1,500=) $9,000
Add to that the $150 dividends and my net worth is $9,150.

Scenario 2:
I stick to mutual fund based on bonds (like I did in the past decade) with valuation decrease of 1.2% and gain 3% yearly interest without growth potential.
After 6 months my bonds are worth (10,000-60=) $9,940 and I received interest of 1.5% totaling 150$.
My net worth at this scenario is (9,940+150=) $10,090.
At this point I can purchase more stocks from the same companies I had in scenario 1

Am I missing something in my calculations?

I punched in the following numbers in an excel worksheet:
1. stocks value increase 5% per year. (what I expect from the stocks)
2. Dividend rate 3% (what I expect from the stocks)
3. Bonds value decline of 1.2% per year (what I have now)
4. Bonds interest rate 3% (what I have now)
5. A dive of 10% in stock price at the (semi-)near future.

According to my calculations if the stock market will dive those 10% before February 2016 than I'm better off sticking with bonds.
At February 16th my 'stocks scenario" net worth will be $10,327.91 while my "bonds scenario" net worth will be $10,321.67.

If I'm reading this right than I need to decide if I believe that the market will take the 10% dive within 19 months from today or not.

So my question is, with the market as it is now, who believes it'll take a 10% dive in the next 18 months?

[TomK]

My original post was mostly a joke, but I'm glad it has spawned a good discussion!

(06-04-2014, 04:24 AM)daat99 Wrote: If I'm reading this right than I need to decide if I believe that the market will take the 10% dive within 19 months from today or not.

So my question is, with the market as it is now, who believes it'll take a 10% dive in the next 18 months?

I don't argue with your math, daat, but would just point out that what you are describing is the very essence of market timing. If you make the right timing calls, then it is a strategy that will outperform most all others. But most of us can't do it well enough to make it pay off. Study after study supports that. "Experts" who have studied the markets their entire lives and who do it for a living can't even do it very well.

So while it seems like a perfectly reasonable assumption that there will be a 10% correction in the next 18 months, I wouldn't count on it either. Folks have been waiting for / expecting / assuming a big correction throughout this 5 year bull market. And don't forget that, while the better entry prices of a correction are great, if you buy now and plan to hold for a very long time, you will weather the (eventual) correction and recovery with no ultimate harm.

I tend to agree with the others who have advocated taking a partial approach. Ramp into positions gradually, and you are somewhat safe in either scenario.

If despite everything you are convinced about your call, nobody will fault you for sticking to your convictions. (At least not me!)

[TomK]

I started this thread about a month ago, when the S&P was at 1908. Here's this morning's screen grab from Yahoo finance, with the S&P at 1962:

   

While a lot of people (including several board members here) believe a big correction must be imminent, I feel like there has been a general shift in tome among the popular media, from the classic "wall of worry" to general optimism with just a whiff of euphoria. Of course no science here at all, but something I like to pay attention to. The more calls for Dow 44,000, the more bearish I'll become!

[Dividend Watcher]

Tom, I saw that too and now it's beginning to concern me a little. We'll see how many others jump on that bandwagon. I think it may be the beginning of a psychological shift.

Not that I'm afraid of a correction or bear market. If Mr. Market wants to get paranoid, it would be fine with me but if so, then stay down for a couple months (or even a couple years) so I can reinvest at better prices dammit. These 2 or 3 day mini-corrections are a pain in the butt.

[Slowlife]

I've struggled with this for the better part of this year. I pick a stock I like and a price I like it at. Then that stock reaches that price, I don't buy because I fear it will keep dropping, then the price goes up. And continues to go up and up and up and then fear I missed my chance. Logically, I know I can't time the market and I'm not making any money not being invested. I also know long term high quality companies will come back. Emotionally, I fear buying now and missing a better buying opportunity later. I need to invest logically, not emotionally, but that's easier said than done.

Currently all the stocks I like are at prices higher than I want to pay. I'm sitting on about 25% cash, which I also don't like. At most I like to sit on 10% cash. Maybe 20 if I'm close to making a buy. Now I'm on the verge of making an emotional buy just because I feel like I need to buy something. I'm literally driving myself nuts trying to figure out what to do.

I've come to the conclusion that I'm not going to wait for a market correction, but I can't figure out if I should buy at current prices or keep waiting on the sidelines.

[EricL]

(08-21-2014, 04:42 PM)Slowlife Wrote: I've struggled with this for the better part of this year. I pick a stock I like and a price I like it at. Then that stock reaches that price, I don't buy because I fear it will keep dropping, then the price goes up. And continues to go up and up and up and then fear I missed my chance. Logically, I know I can't time the market and I'm not making any money not being invested. I also know long term high quality companies will come back. Emotionally, I fear buying now and missing a better buying opportunity later. I need to invest logically, not emotionally, but that's easier said than done.

Currently all the stocks I like are at prices higher than I want to pay. I'm sitting on about 25% cash, which I also don't like. At most I like to sit on 10% cash. Maybe 20 if I'm close to making a buy. Now I'm on the verge of making an emotional buy just because I feel like I need to buy something. I'm literally driving myself nuts trying to figure out what to do.

I've come to the conclusion that I'm not going to wait for a market correction, but I can't figure out if I should buy at current prices or keep waiting on the sidelines.

Are you planning on continuing to make investments over the next 5, 10, 20 years? If so, I think you are over-thinking things.

Its time in the market, not timing the market that makes you money over the long term, especially with dividend growth investing. Now I'm not saying to ignore valuations and blindly buy the market, but I feel there are plenty of stocks out there trading at or below fair value.

If you buy and the price drops significantly next month, then just add to your position and thank the market for the higher yields for dividend re-investments on your portfolio.

[Slowlife]

I am planning on continued investments for the long term and I'm definitely overthinking. It's the logical vs emotional struggle. What I should be doing is making investments based on the info I have today and not worrying about tomorrow. I'm in the early stages of setting up this portfolio and I think my biggest challenge is getting over the emotional fear of making a mistake (or taking a short term loss) and focus on the long term success of my overall portfolio.

For me, I'm excited about setting up my new portfolio, spending as much time as I can researching stocks and ready to pull the trigger on some new positions. In the past I have been a little gunshy and missed opportunities, but I don't want to impulsively buy something just to buy either. I'm finding that no matter what the markets are doing there is always an emotional reason not to invest. I'm trying to stick to my investment plan and make the best decisions I can with the information I have.

[NilesMike]

Sell puts in the stocks you like, at the price you would like to buy it.

Stock falls to your price, you get assigned, no hesitation (and you got it even cheaper due to the credit collected when selling the put)

Stock doesn't fall to your price, let the put expire worthless, keep the premium and do it again.