This is the summary of Episode 3 of our Roaming Returns Podcast.
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Podcast Summary
Current Market Climate
Markets in August 2023 So Far
We think this is a really relevant topic right now. Because since August started, the markets are down 6%.
- S&P 500 is down a little over 6%
- Dow is down about 6.4-6.5%
- NASDAQ is I think, 8.2-8.3%
Our portfolio is just getting smashed. We’re down like $11,000 in two weeks in principle with is 11%-12%. So we’re down dramatically above what the market is down, but we’re not panicking.
Why Are the Markets Down?
The FIX (fear and greed meter) was far on the greed side. Everyone was euphoric. Tim believes that large instructional investors saw an opportunity to make a lot of money, so they incentivized the media to pump fear into the news.
The latest coverage was about how crappy China’s economy is. And then the one before that was that the Feds are going to raise interest rates again. Even though we thought it was already priced in.
The one before that was about Russia doing horrible things to Ukraine. Carmela mentioned some things flying around social media about noteworthy investors selling shares. Basically there’s been a lot of things that have decimated investor sentiment.
Tim thinks this is actually a good sign because it means that this isn’t a valuation issue, it’s a emotional panic price fluctuation to make the big fish more wealthy.
This is how 99% of investors lose money. They get caught up in the fear and panic sell. This is a prime reason to pay attention to what’s happening out there.
Why Down Markets Are Profitable For Income Investors
#1 Everything Goes On Sale
When people are euphoric, they’re willing to pay more than a company is actually worth. When there’s fear, prices drop. For the savvy investor, this means you get to pick up good companies that you want on sale.
Even though we focus on dividends for passive income, we’re always looking for discounts on price. It isn’t hard to find awesome companies at 12-15% (or more) discount when other investors are fearful.
Lower prices means more yield per share (#2) and more shares per dollar.
And when prices readjust in line with a company’s actual value, you’ll see your portfolio increase in value. Icing on the dividend cake.
Tip #1
We used to look for P/E ratios below 20 as being a good indicator of a stock that isn’t overpriced. But now we compare a company’s P/E ratio to that of the average of its peers. This is a much better apples-to-apples approach.
Tip #2
Close ended funds, preferred shares and bonds are really easy to gage value with their NAV prices and par value. It’s just a matter of looking for one that’s above or below 100.
It’s always better to buy preferred shares and bonds below par. That way if they get called back, you actually get paid par value. Plus you keep all the dividend and interest payments you’ve been given.
These assets are a great place to start for risk averse or beginning investors.
Tip #3
Keep some cash set aside so you have capital to buy assets when things go on sale. The main way we do this is to keep excess money in BulletShares®. You can sell them whenever you need to free up capital.
These are fixed income ETFs that trade in a very narrow price range and pay anywhere form 6-8% yield. It’s like having a high interest savings account inside the stock market. (We use Worthy outside the market.)
The closer the year the less volatility these have. We’re in $BSJQ with the maturity date of 2025 because it has a good balance of yield and less volatility.
#2 Higher Yields Per Share
When prices drop, the company is still scheduled to pay out the same dividend. If you pay less per share, you’re percent yield increases. This is why the dividend yield percent changes each day with price changes on places like Yahoo Finance.
Look at the image below to see how the dividend yield changes as the price of a stock goes down.
So if you have a stock on your watchlist that didn’t meet your dividend yield criteria, you’re going to want to revisit those stocks if prices come down. Many become buys during these panic dips.
If you already own shares of a stock that has a drop like this, you can decrease your average buy-in price by picking up more shares.
When you suspect the market (or a stock) will keep going down (we believe September will do just that), you can employ dollar cost averaging as away of decreasing your average buy-in prices systematically.
Note that dollar cost averaging happens automatically if you have DRIP set on for your dividend paying stocks. We always have DRIP set on when the markets are going down.
#3 Money & Reinvestments Buy More Shares
This is a continuation of point #2. When prices of stocks are down, you have more purchasing power whether it’s new money invested or from your dividend reinvestments.
When prices are deflated and you have your DRIP set on to atomically buy more shares, you grow the number of shares you own and subsequently increase your dividend payouts. This is the magic of compounding.
Investing/DRIPing when markets are down really snowballs your passive income.
It also minimizes value loses by averaging down your buy in price. When prices return back to where you started you’ll be up in shares AND up a lot more in value.
Don’t be fooled by the temporary pullback in your portfolio valuation. Start looking at the right metrics — share quantity and dividend payouts. When you focus on portfolio value you’ll become emotionally triggered.
Once you go through this a couple of times it’ll become more familiar to you and easier to not panic. You may even get excited about buying during these times.
#4 Easy Way To Screen Investments
When the markets are down, it’s easier to see which companies are good and which ones were sitting on a house of cards.
Companies that are managed well, can prevail during hard times. So bad markets will create a shake down situation. You’ll start to see patters — Bluechips like Coke and Kroger.
During a down market, we evaluate our holdings to make sure companies make the cut. Cash flow is a big indicator of how sturdy a company is.
Then we look at our watchlist to see how those companies faired. That often narrows our list of about 200 down to primo contenders.
If you see some weak links in your portfolio after experiencing a down market. You can cut all or some losses while things are down and re-allocate into better companies.
This happened with Icahn $IEP and we decided to sell half of our shares because the percent owned in our portfolio was too high for the risk it was posing.
Tip
News and earnings reports can cause pullbacks in specific companies during different times. That’s why it’s important to monitor things using this strategy.
$MPW had a 30% pullback after a bad earnings report and we had to assess the situation and decide how to react — after the emotions had settled of course. (If this was on our watchlist, we’d buy it after this pullback.)
Extenuating Circumstances
Things become even more transparent when unexpected situations like the pandemic happen. It can make sense to cut dividends in that climate. But well managed companies with lots of cash flow can stay the course . Some even raised dividends!
Hercules Capital $HTGC is one of the better BDCs. During 2020, they didn’t suspend their dividend. They actually raised it twice!
Their cash flow decreased as expected, but they were able to withstand the market climate due to good company management.
5 Provides An Opportunity To Buy Less Liquid Assets
Some stocks are hard to get in which makes them hard to get out of when you want to. They either have higher bid and ask spreads or they just have very low trading volume.
This can cost you profits if you’re in a hurry to get out or if you use a market order.
But when markets are down the volume tends to go up in these companies making it easier to buy. There are a few Close Ended Funds and Preferred Shares that come to mind.
Things To Avoid When Markets Are Down
Don’t Sell Low
Don’t buy high and then get pressured into selling low. Emotional and fear based trading never ends well. You lock in losses when you sell.
The reason that over 90+% of people lose money in the stock market is because we buy too high and sell low. If this is where you struggle, we hope to build a community where people can interact with like-minded investors.
Don’t Follow The Herd Mentality
The media only pushes fear or euphoria. Don’t get swept up with the masses in either direction, but especially don’t sell out of fear.
If you want a different/better result, you have to act different than the herd. Expand your scope. Remember the stock market always goes up in the long run.
Don’t Get Caught Without Cash On Hand
You can’t take advantage of price dips if you don’t have any liquid cash to buy assets with.
Some of these fear-fueled drops go fast, so make sure you have money on hand. Better yet, start a BulletShares® reserve so you’re money’s making money while it’s sitting on the sidelines.
Tim’s ideal cash amount is between 10-20% of your portfolio.
Don’t Sit On The Sidelines When The Market’s Down
One of the biggest mistakes beginner or timid investors make is sitting on the sidelines when the markets go down.
You have to play the game to win. And the biggest gains usually happen right after things reach a bottom. You don’t want to miss out on that.
If you can’t stomach going all in when things are heading down, employ dollar cost averaging. You can also get into the low risk BulletShares®. Going in slow is better than doing nothing at all.
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