A recent conversation with one of my neighbors has convinced me, when it comes to the small investor, it’s time to take the gloves off. Here’s what she said that flipped my switch. “Should I sell my stocks because of what is happening in Washington? I have done nothing but lose money since 2008 and now I don’t know what to do.”
You have got to be kidding me. This was a buying opportunity, not a reason to sell. And, the worst part is, she is not the exception. She is the norm, 180 degrees out of sync with the market. The small investor always sells into bad news. In this case, it’s the debt ceiling nonsense that has been making headlines.
Don’t worry. I have been at this too long to try to tell you anything as stupid as “buy low and sell high.” After three decades in the markets, I’ve realized probably 98% of people are incapable of doing it.
This is a chronic scenario that is the ruin of most people, especially the little guy. No one has ever tried to total how much buying into rallies and selling on bad news costs the small investor. I imagine it has to be trillions of dollars a year. But here’s a new way of looking at stock buying that just may correct this disaster.
Bad News Buying
Somewhere along the line the little guy got the idea that because he has money to invest, he has to buy. But for some reason, his buying is always after a runup and never when the market is taking a hit.
The time to buy is when the market presents an opportunity. That means picking up great stocks when they are cheap, not when you have cash. But to make this “bad news buying” approach work you have to stop acting like a rube who just got off a turnip truck and start thinking like a predator.
You must see the market for what it really is… A place where the newbies, the emotional, the undisciplined and the uninformed end up as someone’s dinner. If you try to force opportunities simply because you have some cash and want to buy, I guarantee you will be the entrée on someone’s menu.
Stop drooling over the nightly list of the stocks that ran up the most in that day’s trading session. In 90% of those cases, the money has already been made. Look at the biggest losers and start following them. Study the ones everyone is selling. Understand why they are selling off and look for opportunities there. That’s where the big money is.
And the really good news: You don’t have to go outside your safety envelope to be a “bad news predator.”
In the last year, tons of big-cap companies, many with dividends, have hit temporary rough spots… Coal, gold and copper miners, natural gas drillers, utilities, the list goes on and on.
Despite the big runup in the stock market this year, there are bad news bargains all over the place. Amidst the White House’s war on coal, the incredible low price for natural gas and the world’s sudden aversion to gold… the utility sector is home to some great bargains.
Here’s a perfect example of a great large-cap company with a huge dividend that is one of the best utilities on the market.
A 16% Discount
Southern Company (NYSE: SO) is a rock-solid $38 billion utility company that’s perfect for a retired person’s portfolio. It provides an essential service – electricity – and has demonstrated again and again it is a stockholder-friendly company.
In fact, Southern has increased its dividend 60% in the last six years, has never cut its dividend and is projecting growth of about 5% a year for the next five years. The stock’s current dividend is 5%.
Additionally, it’s selling for about 16% below its 52-week high: $41, down from almost $49. At $41 a share the stock isn’t going anywhere. This is one you could own forever. But maybe one of the best reasons to own it is that no one is looking at it, not yet anyway. Of the 21 analysts who follow the stock, 18 rate it as a “Hold” or “Underperform.”
The White House’s war on coal is responsible for most of the sell-off in this stock. The EPA’s tougher-than-expected new emission standards will cost utilities a lot of money, and it will take some time for Southern to absorb the new costs and get back on track. The herd has been dumping this one, but it is only a temporary setback.
It is possible Southern could drop a little more. But I guarantee if you wait for good news to hit, which it eventually will, and the company moves back to just its previous high, which it will, you will pay too much and the payout will drop to 4%, or less.
The toughest transition for a developing investor is moving from a good news rube to a bad news predator. But this is how you turn other people’s mistakes into your gains.