Many investors root for higher stock prices. If you are a long-term investor, however, you should really embrace lower stock prices if the lower prices are not a result of a permanent impairment to the company.
I recognize why, if you are a short-term ‘investor’, you get excited when a company’s stock price in which you have an existing position rises in value. I also strongly suspect that if you are a short-term ‘investor’, you enjoy monitoring stock prices several times a day. In essence, the thrill of the chase is what drives you. You’re hoping to make a quick hit so you can move on to the next opportunity.
If this is your modus operandi then it is entirely possible you will disagree with my relatively simple low maintenance investment strategy. In fact, you may view me to be lazy. Not a problem. If my wife/me have been able to retire far sooner than most people as a result of my decision to employ a ‘lazy’ investment strategy then so be it.
The reason I like to be ‘lazy’ is because I think my time is far better utilized to identify sound companies in which to initiate and/or to increase a position. I don’t want to be wasting my time looking for ‘exit’ points.
Case in point…. 3M (NYSE: MMM). The records I have on file (~12 years) don’t go back far enough to show when I first acquired MMM shares so I honestly can’t tell you at what price I made my initial MMM investment. I just know from looking at the company’s stock chart that the price was FAR lower than the current stock price. Fortunately, my initial MMM investment was made in a Registered Retirement Savings Plan account (tax advantaged) so my average cost is of little relevance from a tax perspective.
Subsequent MMM purchases through ‘registered’ and ‘non-registered’ accounts were made during the height of the Financial Crisis and in late July 2015. Purchases made over the years have resulted in MMM being my 3rd largest holding.
What does this mean? Quite frankly, I like the company. Plain and simple. The company is consistently profitable and its long-term growth prospects are such that I have no problem being exposed to MMM to the extent to which I am exposed.
Now, let’s look at what happened to MMM’s stock price between June 2017 and today. In early June 2017 MMM was trading at ~$206. At the end of January 2018 MMM had skyrocketed to ~$260. That’s a ~26% increase in the stock price in ~8 - 9 months. The company had been performing well and had been reducing share count which contributed to the growth in earnings per share. The underlying results, however, suggested a disconnect between the stock price and the company’s performance and growth prospects. As much as I like MMM, I wasn’t about to make another ‘bulk’ purchase when I was of the opinion the company was overvalued.
In September 2017, an analyst from JP Morgan downgraded 3M from Neutral to Underweight. Disparaging remarks toward this analyst weren’t hard to find on various investor forums.
On October 9, 2017 I wrote an article wherein I ‘Applauded’ this analyst for having the intestinal fortitude to downgrade MMM at the risk of many in the investment community questioning his sanity and credibility. While I viewed MMM as a wonderful company and a solid long-term investment, I came away with the same opinion that MMM’s stock price had become detached from reality.
I will admit I was second guessing myself as MMM’s stock price continued its ascent; on more than a couple of occasions I questioned what I may have missed in my analysis. When I revisited MMM’s projections and my October 2017 analysis, however, I continued to come away with the same conclusion that MMM was overvalued.
It is not as if I was cheering for MMM to drop because I wanted to INITIATE a position. On the contrary! I indicated earlier in this article that MMM was my 3rd largest holding.
At the end of January 2018, many in the investment community apparently began to come to the same realization that MMM had become overvalued.
I KNOW some readers will question why I didn’t employ an options strategy if I was reasonably certain MMM would likely drop in value. In hindsight, perhaps I could have written $250 - $260 covered calls in mid-January expiring in March, April, or May 2018 but I just did not feel confident that irrational exuberance in MMM was going to come to an end any time soon. Did I leave a few thousand dollars on the table? Sure, but that’s life.
Fast forward to my April 26, 2018 3M – Pullback Has Prompted Me to Increase My Position article; in this article I indicated I acquired another 200 shares at $199.589.
You see, I do not profess to be the world’s most sophisticated investor. I am, however, a long-term investor. I have read and listened to so much of the teachings of some of the world’s best investors that SOMETHING was bound to sink into my brain.
Don’t make investing difficult. Find good companies that are fairly valued, or better yet which are on sale, and buy and hold. Really embrace lower stock prices if the lower stock prices are not the result of some permanent impairment to the company.
Forget this ‘trading’ stuff. It is way too difficult. There is no humanly possible way that you can make a correct call 100% of the time. In addition, if you are an active trader using taxable accounts you’re going to drive yourself nuts at tax time unless you keep impeccable records.
If you conduct a proper investment analysis and your findings suggest a company is overvalued, just be patient for a better entry point. It is very difficult to catch the bottom so give yourself some leeway and don’t ‘draw a line in the sand’ wherein you are adamant that you will not invest in a company unless the stock price reaches a specific level. If you are insistent you will not initiate/increase a position unless the stock price reaches some ridiculously low level you could find yourself sitting on the sidelines for a very long time.
As for dividend reinvestment, some investors like to collect cash dividends and to redeploy them as they see fit. If this strategy works for you then…great. I prefer the easiest strategy and one which extricates me from the decision making process so I can go do things which are far more enjoyable. I have opted to automatically reinvest my dividends unless I know I will require some dividends to cover living expenses.
I totally recognize not everyone will be in agreement with my approach to investing. It is not exciting since you don’t get the thrill of a ‘quick win’. My investment strategy is akin to watching paint dry on the wall. It has, however, worked to date and I am not prepared to radically change it.
On a final note, the intent of this article was not to get you to adopt my investment style. I merely wanted to impart with you that, if you are not already doing so, you really should embrace lower stock prices and to simplify your investing process. There are just way too many more important things you can be doing with your time than monitoring your investments.
I hope you enjoyed this post and I wish you much success on your journey to financial freedom.
Thanks for reading!
Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected]
Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long MMM.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
Members of the FFJ community can access reports I generate on high quality companies which add long-term shareholder value. In an effort to help you determine whether my offering is of any value to you I am pleased to offer 30 days' free access to all sections of my site. No commitments. No obligations. That's 30 days from the time you register at absolutely no cost to you!
