Investing in the market today can be tough, especially if you are trying to build a portfolio of individual stocks. With the US stock market at an all-time high, many people are starting to question the strength of the rally and when it will run out of steam. Now before we get too far into it, if you are a long term investor then you probably don’t care as much about the current price of the market because your investment horizon is 20 to 30 years from now and if you dollar cost average over that time period you will catch both the highs and lows of the market. However, there are some of us out there that will research stocks, ETFs and the like and buy shares when we think the price is either at or below a fair market price.
As many of you may already know, my husband and I like to research stocks and build our own diversified portfolio to try and beat the market. The important thing to note there is that we do not mess around with our retirement savings. Our retirement accounts are invested in mutual funds (401k), target retirement accounts (403b) and ETFs or high yield dividend stocks (Individual IRAs). Our non-retirement money is used to build the diversified portfolio of companies that we believe are or were undervalued when we purchased. This is an important distinction because you want to protect your retirement savings and investments as much as possible and building your own portfolio of stocks can be risky. If you are like us and enjoy doing the research and trying to pick winners, make sure you are doing it with money you are comfortable potentially losing.
Obviously, the goal is never to lose money. In fact, the number one goal of investing is to protect your principal (initial investment) while generating a decent return. While that is the goal, life isn’t perfect and even some of the best investors make the wrong choices, whether it’s bad timing or a poor stock pick, and end up losing money. If you need an example type Bill Ackman into Google. Mr. Ackman took the wrong side of the trade when his hedge fund made a large purchase of Valent pharmaceuticals shares. By the time Mr. Ackman sold his shares his investment and his hedge fund had lost $4 billion dollars, yes that’s right billion with a B. So how do you as an individual investor avoid losses like that? To be honest there is no one answer to that question.
One of the things you must do if you are investing in individual stocks is research (see here: 4 Investing Tips for Beginners). In addition to researching the company’s financial information, its management and its competitors or overall market, you can also look for major current events in the markets. One recent event that moved the markets was Amazon’s bid for Whole Foods Markets (ticker WFM). Amazon’s bid sent ripples through the whole market sending WFM shares up more than 30% and added another 2 or 3% to Amazon’s share price that day. The ripple effect is that it also sent companies like Kroger (KR), Walmart (WM) and Target (TGT) down significantly.
Kroger reacted the strongest going down approximately 30% over the course of 2 days following the bid. That’s right; 30% primarily based on the news that another company was entering the food industry. Granted, Amazon is a beast of a company and it has single handedly turned the retail industry upside down. But a drop like that in a company that historically was a strong, well run-grocer requires further analysis. Rather than bore you with all the financial details (PE ratio, dividend rate, ROE and ROA) I will cut to the chase. The drop in KR stock price was not based on fundamentals or an issue with the company’s management it was just a reaction to the Amazon and Whole Foods news. And it is those reactions that can create buying opportunities in individual stocks because, just like humans, the markets tend to overreact to news and events. Markets aren’t perfect, investors make mistakes and prices fluctuate accordingly, and sometimes those overreactions create the best buying opportunities. In the Kroger example above, I personally believe the market overreacted and allowed investors to purchase shares of Kroger at a price ($21 to $22 per share) which is below their true market value.
Politics are another thing that can cause swings in the market. Oftentimes, there are big drops in the stock market when a new president is being elected or when news of a political scandal surfaces. People fear the unknown, so if a president is elected from a different party, they may change rules for business. For example, Republicans tend to be more lenient on the banking industry compared to Democrats. While it does make sense to fear the unknown, it is not always best to react to that fear by selling stocks.
Markets can get it wrong. If you are investing in individual stocks skim the news daily to make sure you are up on your current events. Technology makes it so unbelievably easy to keep yourself informed, so take advantage of that. You never know, the next buying opportunity can be caused by the next major headline!