On stocks: Never pass up a good sale.

The Washington Post Sunday - - BUSINESS - Value Added THOMAS HEATH thomas.heath@wash­post.com

Start­ing this week, I am go­ing to oc­ca­sion­ally steer Value Added to­ward a con­ver­sa­tion about money, in­vest­ments and fi­nances.

Cap­i­tal­ism fas­ci­nates me. The idea that you can take your hard-earned cash and put it to work in some­one else’s cre­ation and then watch it grow in a way that will make your life bet­ter is highly com­pelling.

Money isn’t ev­ery­thing. But let’s face it: It comes in pretty handy, Bub (to man­gle Jimmy Ste­wart’s quote from “It’s a Won­der­ful Life”).

I do not pre­tend to be an ex­pert. But I have read count­less busi­ness biogra­phies and in­vest­ment books, some good and some aw­ful. It’s a hobby.

So I have ab­sorbed a great deal of in­for­ma­tion over the past 20 years that peo­ple might find use­ful. (I hope.)

A lot of my knowl­edge comes from money minds who sub­mit to the ques­tions when I in­ter­view them for Value Added. What are your rev­enues? How much do you clear? What are your profit mar­gins? Where do you in­vest your in­come? What is your big­gest home run? Your big­gest loser?

Ev­ery­one is on edge these days, won­der­ing when — it is only a ques­tion of when, based on his­tory — the 10-year bull mar­ket will ex­hale and turn to a bear mar­ket.

Bar­ron’s re­cently sig­naled dark skies with head­lines that read: “Stocks Threat­ened by Loom­ing End of Low Rates” and “4 Ques­tions About an Unloved Bull Mar­ket.”

CNBC asks the ques­tion ev­ery day.

So does a buddy of mine at work.

“When is the end com­ing, Tommy?”

If I knew, by now I would be rich and parked in L’Ho­tel in Paris, wash­ing down veal sweet­breads with a Man­hat­tan of Bulleit Rye, a healthy shot of Rouge Dolin and spiced with a splash of orange bit­ters. But I don’t tell him that. I sim­ply throw up my arms with a clipped “Who knows?”

And what would you do if it did tank? Say, overnight Face­book shares dropped from $160 to $50. Would you cut your losses and run? Sell­ing all the stock?

Or would you seize the op­por­tu­nity and buy all the stock you could?

“Sup­pose you were think­ing of buy­ing a new car. You went and you priced it and let’s say the price was $28,000,” said Terrance Odean, pro­fes­sor of fi­nance at the Haas School of Busi­ness at the University of Cal­i­for­nia at Berke­ley. “If you went back a week later and the dealer said we have marked it down to $26,000, you would say, ‘This is a deal. I’m glad I didn’t buy it ear­lier.’”

Bil­lion­aire in­vestor War­ren Buf­fett fa­mously put it this way: “When ham­burg­ers go down in price, we sing the ‘Hal­lelu­jah Cho­rus’ in the Buf­fett house­hold. When ham­burg­ers go up in price, we weep. For most peo­ple, it’s the same with ev­ery­thing in life they will be buy­ing ex­cept stocks. When stocks go down and you can get more for your money, peo­ple don’t like them any­more.”

I al­ways like them — even when they dropped 38 per­cent dur­ing the Great Re­ces­sion.

I sur­prised my­self. For some— one who bites his nails, I re­mained inor­di­nately calm when my stocks tank and my net worth plunged. I tried not to look at the mu­tual fund ta­bles. (I had a brief love af­fair buy­ing in­di­vid­ual stocks two decades ago. I was a naif. I bought a hand­ful of blue-chip stocks, and I still have most of them. Boy, did I ever screw up on some of the oth­ers. But that’s for an­other col­umn.)

Any­way, my at­ti­tude on a stock mar­ket cor­rec­tion is that if the mar­ket never comes back, it means some­thing worse is at work and I will have more se­ri­ous prob­lems to worry about such as war, famine, dis­ease.

I am an op­ti­mist. I be­lieve the mar­ket will en­dure.

But how long can it just go up and up and up?

“A well-de­served 5 per­cent cor­rec­tion could take place at any time, if for no other rea­son than it has been a year since the last 5 per­cent cor­rec­tion,” said Ryan Det­rick, se­nior mar­ket strate­gist for LPL Fi­nan­cial. “This is only the sixth time since 1950 that the S&P 500 has made it at least a year with­out so much as a 5 per­cent cor­rec­tion, and marks the long­est streak since 1995.”

There is hu­man na­ture at work here. Mi­nus a panic, in­vestors tend to sell stocks high and grab the chips off the ta­ble. They are re­luc­tant to sell be­low the pur­chase price be­cause that means los­ing.

The anom­aly is known as the “dis­po­si­tion ef­fect.”

The re­luc­tance tends to dis­ap­pear when a panic takes over and in­vestors worry they may lose it all. That was one of the trig­gers of the Great De­pres­sion and the en­su­ing 25-year stock mar­ket hang­over it ush­ered in.

“In­vestors of­ten want to dump shares dur­ing a stock mar­ket crash be­cause they want to cut their losses and be­cause they fear even greater de­clines,” said Kelly Shue, a pro­fes­sor of fi­nance at the Yale School of Man­age­ment.

If you are will­ing and able to tol­er­ate low stock prices for 25 years, or even five years, you can buy and wait for the come­back.

“It’s very dif­fi­cult to pre­dict when the mar­ket has bot­tomed out and when it will re­cover,” Shue said. “It may be wiser to hold on and to avoid panic. His­tor­i­cally, stocks re­cover.”

I am not smart enough to be a mar­ket timer. But I have a pulse. When the world was col­laps­ing around the 2008 trough, I scooped up as much S&P 500stock in­dex mu­tual fund shares as I could af­ford.

Van­guard 500 In­dex Fund Ad­mi­ral shares that sold for $63 in March 2009 are worth about $224 a share now.

I shov­eled as much as I could of my pay­check into a Van­guard In­dex fund for at least two years — a sav­ings strat­egy known as dol­lar-cost av­er­ag­ing.

Odean likes dol­lar-cost av­er­ag­ing. I don’t mind it my­self.


A stock trader in New York works on the floor as the clos­ing bell sounds. Many in­vestors are won­der­ing when the cur­rent bull mar­ket will hit a wall.

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