Is Opportunity Knocking For Investors?

Buy Low Sell High

If you have heard it once, you have heard it one thousand times. This age-old advice is the epitome of the saying “it’s easier said than done”.

In recent months, my favorite sector, the financial sector has taken a beating. Many of my favorite stocks are now boasting dividends in the mid to high single digits. These dividend yields are quite a bit higher than the average yields for these companies, not to mention that some of the largest banks in the gargantuan US economy are selling at 10-12 times earnings!

Enter Investor Psychology

Even though I have a long-term investment strategy and believe in the future prospects of companies such as Citigroup (C) and Bank of America (BAC), I still have a hard time pulling the trigger when all of the news outlets are forecasting nothing but doom and gloom.

Money is made when one is brave enough to accept a risk that few others are willing to take. We must be willing to step out on a limb and believe in our strategy from time to time, for there is no reward without risk!

Brave or Stupid…You Decide

A recent article in the Globe and Mail outlined the following, which I thought was a spectacular move, and outlines some of my own thoughts:

Bill Miller, the famed mutual fund manager at Legg Mason, might describe as predictable, but illogical, market psychology.

Studies repeatedly show investors place too much weight on information that’s (a) recent, and (b) dramatic. The multibillion mortgage writedowns at U.S. banks are both.

Mr. Miller, who beat the Standard & Poor’s 500 for an incredible 15 consecutive years, has been getting enthusiastic lately about U.S. financial stocks. At the moment, he looks foolish and stupid. Two years from now, he’ll be thought of as brave and wise.

What Mr. Miller is referencing is a common strategy known as contrarian. Being a contrarian is just as it sounds. Contrarian investors buy solid stocks that have fallen out of favor with investors, mainly due to recent news and “panic“.

Buffettology

Mr. Warren Buffett actually played a contrarian role the last time that the financial sector was out of favor in the early 1990’s. Buffett took a large stake in Wells Fargo when everyone else was running far and fast from the financials. If you take a look at a 15 – year chart for Wells Fargo, you’ll see that Buffett looks Brave and Wise now, not Foolish and Stupid!

Buffett also made recent headlines for his investments in Goldman Sachs and General Electric, not to mention a NY Times article in which he proclaimed that his personal portfolio is currently being invested in United States equities.

Are you prepared to look foolish and stupid for a few months in order to look as brave and wise as Warren Buffet in the future?

If so, you too could be taking double digit dividends (and capital gains) to the bank 10 years from now!

10 comments

  1. I bought BAC a month ago just before the recent wave of discontent with US financials and have had to endure a lot of the bad news you wrote about. However, in the long term Goliath rarely loses, and a 5% yield helps sooth the pain.

  2. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
    –Warren Buffett

    That is good enough for me…

    Best Wishes,
    D4L

  3. Tyler, I think there are two problems that many investors run into when they see what looks like a stock bargain.

    1) they become emotional and
    2) they load up with a full position.

    Investors like you mentioned “have a hard time pulling the trigger when all of the news outlets are forecasting nothing but doom and gloom.” When the stock turns around months, or years later, they cannot believe they did not buy at such a bargain.

    Other times, investors perceive a bargain and they load up. Then if the stock continues lower, they either sell in frustration, or hold with no margin of safety.

    My advice in both cases, whether one is buying or adding, is to slowly buy partial amounts of a position. If you think it is prudent to get into a C, or BAC at these levels, then put on a quarter sized position or add 10% to your current position and then wait. Emotionally, if you get an even lower price, you will be happy to add more shares. If the price goes straight up, then you can feel good that you were in near a bottom.

    I recommend having watch lists where you determine where you would buy a stock, or start a position. If you look at the fundamentals, you can find value price levels that work for your strategy. Then, you will know where YOU want to buy BEFORE the panic occurs. Really, the worst thing to do is to try to figure out the value of a company in the middle of an emotional panic event.

    I decided mid summer that I would buy Goldman Sachs under $200. In the late summer I opened a 1/4 sized position at $190. I was then actually hoping the price would go down more. It did. I added 1/4 more to the position at $179, and then 1/2 more bringing it full at $159.

    Now, I have a full position, I never panicked and I feel I have an excellent margin of safety.

    Of course, this is just one example.

    On the other side, I have been adding to my FNF position about 10% at a time from $17 down to $13. There may be no bottom in sight, but I feel the management team is strong and dedicated and I know when the mortgage market turns around in a few years, this company will be the leader among its peers. I do not care to buy the exact bottom. I want to start buying when I see value.

    Happy investing!

    Long GS and FNF

  4. One note, after rereading my post, I seemed to imply that FNF was a mortage company. Of course, it is primarily a title insurer. It would have been more accurate if I had written “when the housing market turns around in a few years, this company will be the leader among its peers.”

  5. Cave,
    I think you are bang on with the full position comment.
    I certainly must take this into consideration. I often feel like I am missing out if I don’t take a full position…but it must match my risk management profile.
    Sometimes emotions can lead us to bite off more than we need!
    Thanks for the comment…keep ’em coming!

  6. I just wanted to point out to one major thing about Mr. Buffett’s new investment in GE and GS. He has bought preferred shares which yield a dividend of 10% annually. Main street investors like you or me do not get the same deal when we buy the common shares. Buffett also get the option to buy 5 Billion dollars worth GS common @115.00 in the future.

    I have great respect for Warren Buffett but I am not too excited in following his recent investments. Instead I would prefer to plough some money in his past investments (which he continues to hold) like P&G, Kraft, Coke et al.

  7. So true about investor psychology. The market is very daunting and to throw your hard earned money into the market right now is something that many people struggle with. With prices so low and dividend yields so high, it’s very tempting though. Investors need to break out of the behavioral finance patterns of the past and stop buying in up markets and selling in down markets. That completely goes against the one most obvious piece of investing advice that everyone has heard, which you mentioned at the beginning of the article, to buy low and sell high.

    People just need to be careful that they are still investing in great companies with a high dividend yield to make sure that the yield is sustainable. Although it’s the last resort for many companies, many are going to have to cut or even stop paying dividends for a while to get through the recession, but if you can hold strong on positions in companies you know will make it you’ll be in good shape.

    Always a pleasure to read your blog Tyler. Keep up the good work!

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