Investors Fall Optimism

This newsletter is intended to help new investors navigate a period in which the markets are at all-time highs and investors are wondering what the next few months will bring. Many customers have been asking the same question: is now the time to buy? Making money in stocks requires researching a range of quality companies and having the patience to buy great businesses at a good price. A disciplined investor, for example, identifies companies with strong fundamentals and a solid track record, keeps them on a watch list, and is ready to buy on a down day in the market. The goal is to build a core holding and reinvest dividends to compound wealth over time. An investor may also choose to own a small number of more speculative stocks — often trading at a lower price with a higher P/E ratio — that appear to be growth companies on the verge of breaking out.

Now, back to today’s markets. With the Dow Jones Industrial Average and the S&P 500 at all-time highs, are investors worried about a big correction coming in October? Investors should always be mindful of the market’s ups and downs. Once the Federal Reserve stops adding liquidity to the economy — currently through the $75 billion a month it spends buying U.S. Treasury bonds — and raises interest rates for the first time in five years because the data suggests the economy has recovered, some kind of correction will probably follow. How deep that correction goes, no one can say. What we can do is prepare for it by keeping cash on hand so that when the market drops, we can buy the stocks on our wish list. For pessimists who believe the market will correct and never return to new highs, a look at past history tells a different story: the markets have always come back, and in a big way. We also recommend reading books written or endorsed by Warren Buffett, arguably the greatest investor of all time — his perspective on market recoveries is invaluable.

None of this means stopping investing and waiting only for the very best names on your list to enter the buy zone. Look for beaten-down stocks with strong sales and earnings histories that may have had a bad quarter or two, but where something in your research makes you confident there is real upside. In other words, be a contrarian investor. As I write this, Whole Foods (WFM) comes to mind — an excellent company whose stock price is down roughly 40% from its high. It is worth comparing to peers in the grocery industry, such as Kroger (KR), which recently announced it is hiring 20,000 new permanent employees. Compare the two companies. The goal is always the same: invest in great, well-researched companies at a price low enough that you believe they will rise again, because the underlying business knows how to make money. Good luck and happy investing from CFE Finances. We will be in touch with another newsletter soon. If you have any questions or concerns, please email us from our contact page.