Over the past few days, I have had a number of people tell me that the market is overheated and they are waiting for a pullback or a correction to get in. If only I had a dollar for every time someone told me that… I wonder if those are the same people who were sitting on the sidelines in the summer of 2009 when the market started to go higher. I’m sure those same people said, “no way, this is a sucker’s rally, the economy stinks” and on and on.
Pull backs and corrections happen every year. But if you think you can time the market, be my guest, because it is impossible. I can tell you first hand that when the market pulls back and corrects, you will be the last person to buy. First, you will be so happy that the market is going down, then as it goes down further, you will start to question if now is the time, and finally, as it falls further, most likely you will be paralyzed and unable to react. Then the next day it will go up and the following day go up even higher and then you will either pay way too much for that stock or do nothing at all. If you do nothing, in this market, you will earn nothing.
We don’t invest in the market. We invest in companies. We focus our efforts on creating a diversified portfolio that makes sense in the context of the current environment. If we can find a stock trading at less than 15 times earnings, has a great balance sheet, has a history of raising its dividend over time and sells a product that people have to use every day, we will buy it. We will buy the stock if the market is at an all-time high and we will also buy it if the market is at an all-time low. We will sell a stock if the valuation gets pricey or if it becomes a too big of a weighting in our client’s accounts. We will never sell a stock because it is going down and we will never sell a stock because it is going up. The only thing that matters is valuation and context. Buy when a company is undervalued and sell when it is overvalued.
Context is used to compare asset classes. Right now, are finding good values in stocks and we favour equities over bonds. If good quality corporate bonds were yielding 7% and we couldn’t find any stocks trading at less than 15 times earnings, we would favour bonds. But in this low-interest rate and low inflation environment, we will take our chances with quality dividend raising stocks over a 2% bond yield.