Why Don’t We Buy Stocks When They Are On Sale?

As I came into the office today, I was reminded of what time of year it is. Every year a very large tree is set up and decorated in the lobby of the building. Years ago it was a Christmas tree but as times changed it became known as a holiday tree. This year, in order to spare the slaughter of an innocent tree, it’s a 10 foot steel cone covered in green, prickly plastic. So, as I walked past the holiday cone I was reminded about what’s coming later this week in the U.S. – Black Friday.  

Black Friday

Black Friday is so named because it’s the day that retailers finally move into “the black” for the year and it’s the day that marks the unofficial beginning of Holiday shopping. It’s also the busiest day of the year for most retailers in the U.S. and a day that many items go on sale as businesses compete for those gift shopping dollars. Seasoned shoppers will do their research by scouring through local papers then line-up early in order to get the best deals – after all, if you can get the same item at a lower price, why wouldn’t you?

Strangely, when it comes to investing it seems that people want to pay more. Mutual fund sales show this time and time again. When markets are close to their peaks, mutual fund sales are strong, but when markets are close to their bottoms, mutual fund sales are weak. But who can blame investors? If we look at markets in the U.S., the S&P 500 Index is currently at levels similar to 10 years ago and while Canadian markets have faired somewhat better, it’s still been an ugly 10 years.

A Lesson In History

In 1974 the S&P 500 Index dropped from a closing value of 99.74 on March 13 down to a closing value of 62.28 on October 3 losing over 37% of its value (note that the index is based on price only and does not include dividends). And much like today, there were several events that were weighing on the minds of investors, such as:

  1. The energy crisis following the OPEC oil embargo
  2. The resignation of President Richard Nixon following the Watergate scandal
  3. The loss of Vietnam war
  4. An economy in recession

What investor would want to be in the market at a time like that?

Well, as it turns out, a very astute one. The table below shows the returns of the S&P 500 Index following October 1, 1974.

S&P 500 Index

From Oct. 1, 1974 1 Year 5 Years 10 Years 20 Years
Annualized return of index 38.13% 16.86% 15.63% 15.11% 
$10,000 invested $13,813 $21,793 $42,723 $166,942

The most important thing an investor can do right now is to learn from history. Although there are some differences between any two periods of time, there are examples of times in the past with many similarities to what we are seeing today.

Those past times represented outstanding investment opportunities in equity markets. No one knows exactly when the market will be at its bottom, but if you’re buying right now, you know for fact that it’s not at its peak. And, like many consumer goods, the market is on sale.

7 comments

  1. We don’t buy them because we are told by the media that this recession will turn into the next Great Depression.
    We will be buying when the media tells us that stocks are the way to go..:-)

    Not surprisingly many solid dividend stocks keep increasing their dividends despite the talk of depression. Most dividend cuts are concentrated in the financial sectors. Haven’t spread to other sectors as of now..

  2. Right on Tyler. The market has dropped so far and stocks are on the cheap. Dividend yields are up an enormous amount as well and even if you’re scared the market might drop further, people should pick up some strong dividend paying stocks so that they can offset any capital losses with dividend income.

    Anyone who has the guys to put money in now is going to be well rewarded in the future. As all successful investors do, think in the long term and stay the course. Dollar-cost-average and stick to your investment strategies. Thanks for the post Tyler.

  3. I like to think that I do have the ‘guys’ since I’ve been buying in a big way during October and November. I like this post and I think what is lost on a lot of people is how quickly situations, events, and environments change. Back then it probably looked hopeless as it does now to a lot of people. The economy will always come back as lean times feed the boom the longer they stay lean.

  4. Another great read! I am elated I had some cash put back from the last few years bonuses (won’t be any for this year). I have been able to slowly bleed into the market as it new lows.

    As an aside, I find the evolution of the Christmas tree both sad and amusing. It freaks our HR professionals when I refer to it as a Christmas tree.

    Best Wishes,
    D4L

  5. I am a retired person with dividend paying stocks. I have tightened my expenses so that I can reinvest the dividends. When the stock market bounces back up, I will start using the dividend for income again. In the future anytime a dividend stock has a price drop, I will reinvest the dividend. I have a Schwab account and it is very easy to change the dividend payment.

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