All traders know the trend is your friend. That is, you buy when prices are rising and sell when prices are falling; a seemingly self evident truth that is entirely logical, or is it? A trend is only a trend until it ceases to be, and identifying the exact timing of a reversal in advance is not easy. An uptrend in progress could continue for another day, week or even month, and who knows whether any pull-back along the way will merely be a brief correction or the start of new and sustained downtrend?
Side note: This is also the case with many other technical phenomena such as support lines; that is, a line of support can only ever be said to have merit after the fact. Either the support line held or it didn't, and only with hindsight will we ever know for sure. Often this fact is used to the advantage of forecasters who will use spurious reasoning to demonstrate their prescience. For example, as the market approaches an area of historical support you will often hear many pundits proclaim that “if the line of support holds the market will return to an upwards trajectory”. But this is one of those open ended statements that can never be wrong, regardless of the outcome: either the market will bounce of the line of support or it will break it. In essence all that has been said is that the market may reverse at a given level or it won’t. If it does, the forecaster will remind the world of their amazing foresight, and if it doesn’t? Well they only said that it could hold, not that it definitely would hold. Moreover, even if it does hold, who is to say the market won’t again reverse and then subsequently break the line of support?
But I digress, the point I want to make is that investors should have a different mentality altogether, in fact the exact reverse. Total investment return prospects rise as share prices fall, and likewise decrease as prices rise. As the share price drops dividend yields increase and the starting yield of an investment is one of the most important determinants of total return. Similarly, as prices fall the potential upside capital gain increases, all else being equal.
The investor isn’t, or at least shouldn’t, be overly concerned with trying to gauge turning points in the market. What matters is that they purchase an asset at a price that represents good value. Only with the benefit of hindsight will we ever know that we purchased a stock at its lowest point, at the price of maximum possible value, and such a focus can be at best distracting and at worst utterly destructive, forcing us to liquidate otherwise attractive investments purely because they didn't immediately rise in value after the purchase.
Take for example the current market correction. CBA hit a year to date high of $59.83 on the 16th of April 2010 (while, it should be noted, it was firmly in an unambiguous uptrend). At that time it was trading with an indicative dividend yield of 3.8%. Since then it has fallen by as much as 15%, sending seemingly rational investors rushing for the sell button and dumping a quality asset in panic. But from an investor’s point of view, one that isn’t looking at accessing their capital any time soon, it represent an excellent opportunity to buy more; shares that are offering a very attractive yield of 4.5%. Given the current yields being offered by cash and fixed interests investments this is relatively quite high, especially when you consider the potential for longer term capital gains. From a valuation standpoint, the PE of CBA has dropped from 18 back to 15, a far more attractive figure and importantly one that offers greater capital return prospects.
Even the mighty Warren Buffet rarely buys shares at their lowest point, but then he isn’t aiming to do so. He just wants to acquire quality assets at good value. If the price continues to fall, and business prospects remain sound, well that just provides further buying opportunity. It’s not necessarily a case of just ‘averaging down’; it’s about continuing to building a stake in a profitable and growing business.
As DividendKey students know, the price of your shares matter only when it comes time to sell, which for most investors will be at least several years down the track. In the meantime, the only thing that matters is that dividends remain attractive. Of course, no one likes to see the value of their assets drop, but share market investors must accept that price volatility is merely the nature of the beast. It is the price we pay for exposure to the best quality investments available.
If you are fed up with trying to time the ebbs and flows of the market and want to get serious about building a portfolio of quality assets, ones that will provide reliable, rising cash rewards, then check out the DividendKey course. At $200 you have nothing to lose, and if after the first lesson you feel it isn’t for you, well we will refund the cost in full, no questions asked. How can you go wrong?
Make the markets work for you!