The topic today is bargain hunting…
Most small investors are great savers and – in all other things except investing – good bargain hunters.
But, when it comes to stocks and bonds, they are the worst.
This is most critical when it comes to retired investors. Retirees are the ones who have to make the most from their money.
The basic premise you must accept and understand to be a stock bargain hunter is that every market correction or sell-off – no matter how big, how bad or how inopportune – every one has not just recovered but run to new highs.
Take the worst of the worst scenarios – the Great Depression and then the Great Recession a few years ago. Even these recovered and have run to new, record highs.
Retired investors have several rules that cannot be broken. One is to buy new positions or add to current positions on pullbacks and corrections.
It is the only way to keep from paying too much for equities, and it allows you to maximize income. Cheaper stocks equal higher yields.
Training Yourself to Look for Bargains
The way I have trained myself to look for bargains is to keep a wish list of stocks I’d like to own but that I think are too expensive at the moment. Then I look for weakness in the stock or sell-offs.
Late May and early June of this year have been like Christmas for bargain shoppers. Great stocks had a decent sell-off and there were real bargains to be had.
Of course, any time we talk about bargain hunting, the issue of market timing has to be addressed. And as we all know, it doesn’t work.
But what I am suggesting is not timing, not really. It is betting on maybe the only things the market guarantees: sell-offs and recoveries.
So, if you buy at just about any point in a sell-off, whether it’s at the bottom or not, history tells us you got a bargain, because the market always has and will recover.
This is the single most difficult thing for the small investor to do, and one of the most important for the retired investor to learn. If you buy at lower prices you guarantee higher dividend yields, and it gives you a leg up on inflation by increasing your chances of capital gains.
The safety the little guy thinks he gets by buying after the market has run up, or when it is at new highs, is a trap that will catch everyone. Sell-offs are gifts and you need to train yourself to see them that way.
Next week: Is it possible to tell when is a stock is overpriced?
P.S. Alexander Green, the greatest stock picker I’ve seen in the business, capitalized on the sell-off after the Great Recession to rake in enormous gains in very safe companies for his Oxford Club members.
For instance, Diageo PLC (NYSE: DEO) is up 159%; Phillip Morris Intl. (NYSE: PM) is up 193%; and Discovery Communications (Nasdaq: DISCA) is up 257% – in just a few years. These aren’t risky penny stocks, either…
The truth is, sell-off or not, bargain hunting in stocks is a much more lucrative strategy than most people realize. In fact, it’s exactly the method Warren Buffett used to become a billionaire…
For more on how you could use this simple technique to generate close to $100,000 or more in the next year, click here.