I saw today a rather unfortunate article on MSN titled “Is it safe to buy stocks again?” If I were one to post pictures, I’d post a picture of a “Facepalm” or “You’re doing it wrong” internet meme.
The context of course, is that this title and ones like it come after a 3-year bull market from the market bottom. Welcome, you’re late to the party.
The article goes on to call 2012 another lousy year for markets, and suggests against a buy and hold strategy for the short term but remains optimistic for the long term. Following the kind of mindset of waiting until it’s “safe” to buy shares of quality companies, is a good way to make sure you participate fully in market drops, and miss out on market rises.
At this point, I’d suggest that based on metrics such as capitalization/GDP or average dividend yield, the American stock market as a whole is either fairly valued, or slightly overvalued. But more importantly, the reasonable thing to do for investors in individual stocks, as always, is to buy quality companies that have valuations that are currently less than their intrinsic value, as calculated by discounted cash flow analysis or some other viable model. Usually one finds the most undervalued companies when compared to their intrinsic value during times when stocks aren’t “safe”.
Buy quality companies, buy at good prices, remain diversified, and focus on the numbers and on conservative estimates, in any market.
Here are a few more rational links for the week.
CEO of the Year
Morningstar analysts discuss their CEO of the year award that went to James Sinegal, CEO and co-founder of Costco. He recently retired as CEO and remains on the board of directors. He received the recognition for willingness to receive lower than normal executive compensation, his tactic of utilizing higher than normal worker pay (and therefore lower turnover and higher productivity, at the cost of lower margins), Costco’s successful efforts at piercing Walmart’s moat and growing strongly, and his overall level of integrity and leadership. I agree with Morningstar that Costco stock is slightly overvalued, but that the company has been exceedingly well managed.
How NOT to Invest in Water
Sometimes you have to be careful to avoid hype. 101 Centavos sheds some light.
Unilever Analysis
Dividend Growth Investor provided an analysis of Unilever. He considers the company attractively valued.
How Canada’s Banks Let Canadian Investors Down
Andrew Hallam provides yet another quantitative example of why actively managed mutual funds are inferior to passive index funds.
Dividend Income January 2012
The Passive Income Earner earned nearly $5k in passive dividend income for 2011. He’s aiming for $7k in 2012.
Dividend Stock Power Ranking
The Dividend Guy apparently didn’t get the memo that dividend investing is serious business and no fun is allowed. :) He posted a power ranking of the 24 companies in the dividend growth index.
My New Ride
Dividend Mantra shows frugality by purchasing a very used car. He’d prefer to spend his money on appreciating assets than depreciating assets.
Arbor Investment Planner
I was included in a blog carnival. It’s a nice list of reads.
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Thanks for the mention Matt.
I agree with you on the lack of value. It seems a lot of us dividend growth investors around the web are a little disappointed/frustrated by the strong rally of late ’11 and early ’12. The thing that scares me is that articles like you pointed out above, in addition to the talking heads on TV, are starting to give people the green light to buy stocks which could then raise the market from already heightened levels. Of course, that’s when the bubble pops and everyone sells….maybe it’s a good time to build cash reserves! :)
Best wishes for your weekend.
Fortunately, I’m still finding companies that are trading for below my calculated intrinsic value for them. So I’m not alarmed; it’s just that we were all spoiled in 2009 :)
It does mean, however, that only a subset of companies that I analyze are attractively priced in my view, rather than practically all of them. I keep bonds and cash around, but it’s fortunately not at the point yet where I can’t find good investment opportunities.
When the market is overvalued, one can indeed build a cash position, build a bond position, or even write puts for stocks for prices that correspond to their intrinsic value or lower.
Thanks very much for the link, DM.
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