Why I am not buying yet

November 23, 2011

Some market commentators are issuing notes to stimulate investors to start buying shares at these ‘ridiculously’ low levels.

Instead, when stock markets are as bearish as they currently are, and your cash supply may be limited, you certainly should become a lot choosier on what, when, and at what price to buy shares.

Share prices can always go lower, much lower in fact, even if nothing is particularly wrong with a particular company.

As an investor, rather than a speculator or trader of stocks and shares, I very much keep in mind Warren Buffet’s wise advice: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”.

That kind of thinking should immediately focus the mind on considering to buy high quality companies’ shares, but only when they’re cheap . . . real cheap.

When are shares really cheap?

As a Dividend Income Investor, I would say shares are really ‘cheap’ when high quality dividend paying companies’ share prices are historically undervalued.

The flipside of this is that their dividend yields are ‘high’ based on business activities which support increasing earning in most situations which allow for sustainable dividend yields that can match annual inflation rate.

Unfortunately, based on our proprietary valuation screens, there are still not that many FTSE100 companies that fit our bill. In fact, our research indicate that you can count them on less than two hands.

Is it not yet time to buy some bargains?

Some people are of the opinion that with the FTSE100 on a forecast P/E of less than nine, now it’s definitely time to be buying some “bargains”. Some people say that this falling market is offering excellent opportunities. Others are of the opinion that we’re even past the worst.

I am afraid I am not of that opinion!

So far, the FTSE100 has gone down on average 1% almost on a daily basis the last few sessions while some pundits are now predicting that a drop to at least 4800 is a distinct possibility in the next few weeks, in particular if headlines continues such as:

  • “Germany suffers disaster at bond auction”
  • “Spanish and Italian bond yields again around or above 7%”
  • “France’s AAA credit rating under threat”
  • “Merkel blocking Eurobond solution”
  • “US stocks down 300 points in two days due to Congress deadlock”
  • “Asian stocks down on US and China growth worries”
You may think that at Dividend Income Investor.com we try to time the stock market. In fact, we are not.

Instead, our proprietary valuation screens allow us to confidently time our entree and exit levels for certain individual high quality dividend paying shares. As a result, we are only interested in relatively few companies.

Why is bad news good news for long term investors

Private investors who invest for the long term – ten or twenty years or so – should welcome a continuation of the markets downward path, in fact, in time you should be able to pick up some high quality high yielding shares when they are truly undervalued.

In the Guide to Dividend Investing we commit a whole chapter on patiently waiting for the right moment for when Mr Market offers tremendous bargains.

I for one will therefore be waiting with buying more dividend paying companies, in order to benefit from the superior discounts in both dividend yields and long term value from quality companies.

It wouldn’t be long now when fellow ‘investors’ are desperately trying to sell them to me at then ‘ridiculously’ low levels. Indeed.

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mike January 22, 2012 at 11:04 pm

Since I believe it impossible to time the bottom of the market (unless by pure chance) I practice pound cost averaging.


sjdotsch March 19, 2012 at 2:46 pm

Hi Mike

We do not aim to ‘time’ the bottom of the market rather what we have developed is a way to ascertain whether a high quality dividend paying company is either:

1. trading in, at or near its historical undervalued range (a possible buy),
2. trading in, at or near its historical overvalued range (a possible sell), or
3, trading somewhere between its historical undervalued and overvalued range (therefore neither a buy nor sell, rather a hold, raking in increasing dividends)

Steven Dotsch
Managing editor
Dividend Income Investor.com

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