Bull Market

[notexactly]

Hey guys,

I'm brand new to investing, and I wanted to make a thread on an observation I've made.

Based on my reading and research, we are in a bull market right now, and possibly in the later portions of it. When looking at many stocks, I'm finding that it's hard to find stocks at a good deal. Given that good stocks usually find themselves only discounted during a bear market, would it be wise to hold off on investing for a year or so and purchase stocks when they are not overvalued?

If anyone could let me know if my logic here make sense or if I'm making an error somewhere.

Thanks guys,
NotExactly

[navyasw02]

Timing the market for the best opportunities is pointless. Prices can rise or fall in a year, nobody knows. The best bet is to continuously search for stocks that have better valuations than the broad market and/or meet your specific set of criteria for purchase. Continuously re-evaluate your stocks for exit points or for additional entry points on dips. Stick to your criteria and don't buy or sell based on emotion.

[crimsonghost747]

Yes, you logic does make sense. The problem is, I can't predict the future and chances are you can't do it either. I personally have seen the market as overvalued for quite some time already but if I would have stopped purchases back then I would have missed out on a lot.

I would recommend buying steadily but keeping a bit of extra cash on the side so you can buy with more $$$ if the downward correction comes.

[NilesMike]

Make your wish list of stocks you would like to own. When they go on sale, as determined by you to be a good value, you buy them. There were many good buys in the very recent past and all throughout this secular bull run.

Good luck

[Dividend Watcher]

notexactly, first I want to say welcome to the forum! Somehow I missed your introduction thread. You are in an enviable position.

I agree, we are in a bull market. Furthermore, I believe we are in the first stages of a secular bull market meaning an extended period of increasing stock prices but punctuated with corrections or cyclical bear markets. That being said, I don't believe we're at the end of the first stage yet -- the Great Recession did too much damage and created too many dislocations.

Why do I say this? I don't see corporate growth peaking. In fact, I don't think corporate growth ever really got revved up to unsustainable levels. As much of the growth we did experience was done by financial engineering -- dividend cuts, share buybacks, reorganizations, mergers & acquisitions -- as by actual consumer & business spending. Employment didn't get so tight that "job hopping" became a challenge for businesses. Credit hasn't tightened for those that have decent credit records. Inventories couldn't keep up with demand -- in fact, inventories are still relatively lean because the demand is just not there. Despite all that, I believe we could have a correction at any time.

I believe the economy is in the middle of another transformation much as the industrial revolution changed the 20th century. Looking back from afar, I believe the tech boom of the late 90s set the stage for the transformation we're undergoing. As a result, you're going to see changes in how the whole world operates. Of course, you may not see the forest because of the trees. We're living it and it's hard to recognize such things in real time and only with the benefit of broad-based hindsight do such things become apparent. Companies will evolve, new industries will emerge and our lifestyles will change; it's actually quite exciting if you think about it.

Enough of my hocus pocus, voodoo talk because not much of it is actionable. I'm wondering why that all flowed through my feeble mind and I guess I just wanted to counter your fairly definitive assertion that we're near the end of this bull run and it's not a good time to invest. Broaden your outlook a little maybe? This not a slam against your opinion so don't take it the wrong way. I could be totally wrong and have been accused of being too optimistic at times also. (Probably doesn't help that it's Saturday morning and I have no set timetable on a long weekend so I have the luxury of letting my addled mind wander.)

I'll really start by asking whether you have a plan developed for where you want to go investing-wise and how you're going to get there. For that, I'll point you to the thread on my business plan. hendi_alex started another thread with some interesting thoughts and viewpoints here. You can also search on Seeking Alpha for Bob Wells' and David Van Knapp's articles on portfolio business plans. Realize that this plan will change over time as you learn more things and your goals and wants change. And change they will.

After all that, I'd suggest looking at fairly valued (or close to it) companies and start a slow, methodical investment regimen. Perhaps you buy only a quarter or a fifth of what you feel is a full position right now and start reinvesting those dividends. If you're unsure what that means, buy $1000 at a time. If they take a significant drop in the near term, take another bite. Piece by piece, you'll be building a portfolio that in 10 or 20 years time will amaze you. By the time you retire, worrying about where you want to invest will be a fool's game. Unless you're a die-hard value player -- and I posit that since you are just beginning to learn about investing you may not be completely aware on what that entails -- buying at reasonable, or even slightly elevated, prices now and letting time work its wonders will ameliorate any damage from a silly market downturn.

If I were you I'd look at things like JNJ/ABBV, COP/CVX/XOM, PH/EMR, AMGN/GILD (it's now officially a dividend payer), ROST/TJX, LMT/RTN, KO/PEP, AAPL/MSFT HCP/WCP/OHI or even DE/CAT right now. I don't think any of them are outrageously priced -- especially for the time frame you're looking at.

Remember, it's time in the market and not timing the market that gives the individual investor the edge.

[DividendDragon]

(05-23-2015, 10:12 AM)Dividend Watcher Wrote: Remember, it's time in the market and not timing the market that gives the individual investor the edge.

Love this quote DW!

My advice as someone in a similar position is to buy high quality dividend stocks even if they are slightly overpriced (not outrageously of course).

[notexactly]

Thanks for the responses guys.

I knew this outlook would be flawed, I was more so seeking what was wrong with the perspective than actually defending it. I definitely got my answer.

So we are focused on the very long term, market fluctuations are not predictable therefore predicting them is a fools game, create a criteria to value companies and make decisions based on that not on emotions, and timing the market is not as important as a factor as time in the market.

The last one for me is a bit harder to grasp. I know we are focused on dividends and strong stable companies, but capital appreciation of our stocks must be a factor as well? Could someone delve deeper into this? I would appreciate it!

My current portfolio is in its infant stages. I have 8 shares of XOM @86 a share, and I have a couple shares of Apple because I am an employed by them and enroll in their ESPP plan. JNJ is the next stock I am looking to jump on.

[Dividend Watcher]

(05-23-2015, 10:50 AM)notexactly Wrote: I knew this outlook would be flawed, I was more so seeking what was wrong with the perspective than actually defending it. I definitely got my answer.

It's not necessarily flawed. I just countered with my opinion. You could be right and we could be starting a bear market in the next 6 months. I do agree that it's more difficult to find stocks that are reasonably priced right now but they are out there. I don't think the suggestions I gave are too outrageously priced and may give you market average 7-10% total returns going forward.

(05-23-2015, 10:50 AM)notexactly Wrote: So we are focused on the very long term, market fluctuations are not predictable therefore predicting them is a fools game, create a criteria to value companies and make decisions based on that not on emotions, and timing the market is not as important as a factor as time in the market.

Hmmmm, learned your lessons well you have, Padawan.    

(05-23-2015, 10:50 AM)notexactly Wrote: The last one for me is a bit harder to grasp. I know we are focused on dividends and strong stable companies, but capital appreciation of our stocks must be a factor as well? Could someone delve deeper into this? I would appreciate it!

You have two things pushing up prices over time.

1. Increasing earnings: The type of companies we are talking about have the tendency to keep increasing their earnings. Sure they have slumps and rough periods. Some are internal causes and sometimes it's the economy, stupid. Sometimes it can take several years for a company to work out their internal problems but dividend growth companies do have the ability to bounce back. Afterall, the dividends have to be supported by their earnings. No one is going to let KO's price drop or stagnate to only 5x earnings without something catastrophic happening.
   
2. Increasing dividends: Like wise, as the dividend increases, yield will keep going up for a company with a stagnant stock price. You will never see JNJ yielding 10%. Someone will buy them out long before that happens.
   

Your job is to find the companies that can increase their earnings over time and be willing to share their results with their owners. Then you have that double whammy that brings the capital gains along for the ride.

As for the "time in the market" comment -- first, you don't know when a company's stock price is going to make that next big jump to the next price range. If you miss it, you've just lowered your return going forward.

Second, if you're reinvesting those shared profits whether in the same company or another, the payments you missed can't be made up. Sure, the difference is minimal over the short term but 10 years from now it could be a noticeable difference.

All that being said, you still don't want to grossly overpay. Then you could end up like the "lost decade" of the 00s. People who bought MSFT around 2000 with a P/E of around 50 spent the next decade (longer actually) until earnings caught up and the price came down to a reasonable level. I know, I was the poster child for that scenario for the first few years.

You've got a good start. Patience will get you where you want to be.

[notexactly]

(05-23-2015, 07:55 PM)Dividend Watcher Wrote:

(05-23-2015, 10:50 AM)notexactly Wrote: I knew this outlook would be flawed, I was more so seeking what was wrong with the perspective than actually defending it. I definitely got my answer.

It's not necessarily flawed. I just countered with my opinion. You could be right and we could be starting a bear market in the next 6 months. I do agree that it's more difficult to find stocks that are reasonably priced right now but they are out there. I don't think the suggestions I gave are too outrageously priced and may give you market average 7-10% total returns going forward.

(05-23-2015, 10:50 AM)notexactly Wrote: So we are focused on the very long term, market fluctuations are not predictable therefore predicting them is a fools game, create a criteria to value companies and make decisions based on that not on emotions, and timing the market is not as important as a factor as time in the market.

Hmmmm, learned your lessons well you have, Padawan.

(05-23-2015, 10:50 AM)notexactly Wrote: The last one for me is a bit harder to grasp. I know we are focused on dividends and strong stable companies, but capital appreciation of our stocks must be a factor as well? Could someone delve deeper into this? I would appreciate it!

You have two things pushing up prices over time.

1. Increasing earnings: The type of companies we are talking about have the tendency to keep increasing their earnings. Sure they have slumps and rough periods. Some are internal causes and sometimes it's the economy, stupid. Sometimes it can take several years for a company to work out their internal problems but dividend growth companies do have the ability to bounce back. Afterall, the dividends have to be supported by their earnings. No one is going to let KO's price drop or stagnate to only 5x earnings without something catastrophic happening.
   
2. Increasing dividends: Like wise, as the dividend increases, yield will keep going up for a company with a stagnant stock price. You will never see JNJ yielding 10%. Someone will buy them out long before that happens.
   

Your job is to find the companies that can increase their earnings over time and be willing to share their results with their owners. Then you have that double whammy that brings the capital gains along for the ride.

As for the "time in the market" comment -- first, you don't know when a company's stock price is going to make that next big jump to the next price range. If you miss it, you've just lowered your return going forward.

Second, if you're reinvesting those shared profits whether in the same company or another, the payments you missed can't be made up. Sure, the difference is minimal over the short term but 10 years from now it could be a noticeable difference.

All that being said, you still don't want to grossly overpay. Then you could end up like the "lost decade" of the 00s. People who bought MSFT around 2000 with a P/E of around 50 spent the next decade (longer actually) until earnings caught up and the price came down to a reasonable level. I know, I was the poster child for that scenario for the first few years.

You've got a good start. Patience will get you where you want to be.

Thanks for the breakdown Dividend Watcher. I appreciate it. Very informative.

May I ask how you value your companies personally? P/E <20, etc.

[Dividend Watcher]

(05-25-2015, 03:24 PM)notexactly Wrote: May I ask how you value your companies personally? P/E <20, etc.

My Portfolio Business Plan outlines my buy criteria as well as considerations for a sale.