Why I Consider Buying In A Declining Market Can Often Be A Good Thing

Well, the truth is, for all investors this is a scary time. For dividend investors, there can be an added silver lining. Read on…

Cost Analysis
With prices down, stocks appear to be “bargains.” This is both dangerous and an opportunity. Of course, danger is that prices could continue to fall. Who would want to buy stocks and then have them decline further?

A Different Bernie
Bernard Baruch (1870-1965) was an American financier, stock investor, philanthropist, statesman, and political consultant, according to Wikipedia.  Among others, he was an advisor to Presidents Woodrow Wilson and Franklin Roosevelt.

By profession, Baruch was a investor/stock speculator, and for a time owned a seat on the New York Stock Exchange. Understanding that stock prices were overvalued, he sold in 1927 and 1928.

The Secret Of His Success
In later years, when he was asked the secret of his success, he answered ‘”I made my money by selling too soon.” 

Selling when others would consider “too soon” allowed him to escape the crowd, and avoid trying to squeeze the last drop of profits from his holdings. By thinking one can wait until the last minute to sell, means one waits too long.

The Opposite Seems to Be True, As Well
If one waits for when they think the absolute bottom is to buy, they will miss it. And as a dividend investor, there can be an added benefit by buying “too early.”

Question Time
Let’s assume dividends continue. This is a questionable assumption given the state of the current economy. It seems obvious that some dividends will be cut, some will be eliminated. And some companies will not survive. But let’s for a moment assume that some dividends will continue.

Occupant Capacity. 2020.
Occupant Capacity. 2020.

Conventional thinking posits us currently in a recession. There is some talk of a depression. Regardless of what you call it, things have slowed. So let’s not focus on the name, but the condition.

Let’s turn to Mr. Baruch: “I had never experienced a depression before. But even then I began to grasp dimly that the period of emergence from a depression provides rare opportunities for financial profit.” 

Idea, Step 1
Here’s a thought experiment. Suppose the market is going down. Sometime before it hits bottom I buy some stock. During the time the price declines, using dividend reinvestment, my dividends will purchase some shares. This might go on for one time (one quarter) or for several quarters. Since the price is declining, I am able to purchase more shares with my dividends. Maybe I add to my position by investing additional funds. This is all when others would consider that I am buying “too soon.”

Idea, Step 1
Then, sooner or later, we hope, stocks hit bottom, and start to increase. We continue our dividend reinvestment. As prices are now increasing, fewer shares are being purchased with each subsequent dividend. Maybe I add to my position by investing additional funds.

The Point
The point is, using dividend investment, I would end up with more shares during a bear market than during a bull market.

Of course, none of this is guaranteed. Stocks could continue to decline or go nowhere. Companies could be acquired or go out of business. All sorts of things could happen, bad or good. If I buy stock, I would like to do so in good businesses likely to survive. Since I am a dividend investor, I am looking for situations when I can profit. This seems like one of them.

Too Soon?
The current popular press is all (or mostly) shouting: “It’s too soon to buy.” So, if Bernard Baruch realized he made profits by “selling too soon,” then profits can be made by “buying too soon.”

What do you think? Buy time or sell time? Comment here.

The room capacity photo was taken in 2020 in Alameda, California.

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