Buying Stocks On Sale

I was away for only a week, and look at what happened. After I came out of my seclusion, I heard we beat the clock on the debt ceiling but Treasurys got downgraded anyway. I was surprised to see that my limit buy orders were all filled last Thursday and Friday even though I didn’t expect them to execute when I entered them.

I entered another limit buy order on Sunday evening at a price about 5% below Friday’s closing price; it executed mid-day on Monday. Another order was filled at 3:58 p.m. Eastern Time, two minutes before the closing bell. I ended up putting more money into stocks in the last three days than I did in the last two years. I bought back some of the ETFs I sold in April.

Is there such a thing as buying stocks on sale?

There are two schools of thought on this. The "Yes" school says Mr. Market sometimes goes berserk and offers stocks at ridiculous prices, either ridiculously high (March 2000) or ridiculously low (March 2009). If you take advantage of Mr. Market’s crazy offer, you get to buy stuff on sale.

The "No" school says stock prices are forward-looking. They incorporate information available at that point in time. When prices are high, the then available information points to a rosy future. When prices are lower, as they are now, new information has emerged that says the future isn’t as rosy as previously thought. Therefore lower prices don’t mean stocks are "on sale" or of a better value. Prices are lower because you are buying into an inferior future.

I see merits in both arguments. Fear and greed do drive prices to extremes but it’s also difficult to tell the difference between when prices are justifiably low and when prices are low for no good reason other than investors’ irrational fear.

It had been like this in October 2008. After the initial sharp selloff, the market bounced at the bottom for a while before reaching a new bottom. Since I can’t call the bottom, I can only keep buying on the way down.

I’m buying because I’m not that pessimistic. I see businesses booming around me. We keep getting emails from HR asking us to refer qualified candidates to fill open positions. I see stocks offering a much better value than bonds. In a few years time, I believe the money I took out of bonds to buy stocks now will be worth much more than if I kept it in bonds.

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Comments

  1. says

    Same for my company, in fact for the entire sector, are currently hiring aggressively.

    But I think the government is really screwed. When we are in personal debt, we’ll work to increase our earning and reduce our expense, usually doing both. The government (and the constituents) don’t seem to comprehend basic math. Instead it is driven by politics to do exactly the opposite (cut tax, increase spending). Throw in aging population and ballooning health expense. The future of US government, and for that matter government of many other countries, look ugly to me.

  2. serbeer says

    TFB, I am curious where do the funds for the limit buy orders that were filled came from? Do you normally keep a chunk of your porfolio in cash? Or do you execute conditional sell orders for bonds before buy orders for stocks?

  3. says

    @nickel – Yes I do have some positions with an unrealized loss. Obviously the shares I bought last Thursday and Friday are still showing a loss. At some point I will consider harvesting the loss.

    @Wai Yip Tung – I completely agree with you about the unrealistic expectations.

    @serbeer – I don’t normally keep a lot of cash, which earns nothing now, but this time I had the cash out from my recent refi. I hadn’t decided what to do with it yet before the market decided it for me. After the limit orders were filled, I sold bonds to replenish the cash. I will keep the cash for a while and see where the market goes.

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