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The Best Time to Buy Steaks and Stocks

By Christopher H. Browne
Saturday, January 6, 2007

"ON SALE” are two of the most compelling words in advertising.

Imagine that you are in the supermarket, strolling down the aisles gathering your groceries for the week ahead. In the meat aisle, you discover that one of your favorites, prime Delmonico steak, is on sale – down to just $2.50 per pound from the usual $8.99 per pound. What do you do? You load up the cart with this delicacy while it’s cheaply priced. When you return the next week and see those Delmonico steaks priced at $12.99 a pound, you pause. Perhaps this week, chicken or pork might be a smarter buy.

This is how most people shop. They check the sales flyers stuffed in the Sunday newspaper and make their purchases when they spot a bargain on something they want or need. They wait until they see that dishwasher or refrigerator on sale no matter how much they want or need a new one. Every holiday, they flock to the mall to take advantage of the huge bargains that are only offered a few times during the year.

When interest rates drop, they run to the bank or mortgage broker to refinance or take out new and bigger mortgages. Most people tend to look at pretty much everything they buy with an eye on the value they get for the price they pay. When prices drop, they buy more of the things they want and need. Except in the stock market.

In the stock market, there is the irresistible excitement and lure of the hot stocks everyone is talking about at cocktail parties – the ones that are the darlings of the talking heads on cable stock market shows, and the financial newsletters tell us that we must own. It is the wave of the future! It is a new paradigm! People believe that they’ll miss a terrific opportunity if they don’t own these super exciting stocks.


There are reasons for this pattern of behavior: First, investors are afraid of being left behind and like the idea of owning the hot and popular stocks everyone is talking about. They also find a certain comfort in knowing that lots of other people have made the same choices (like fans cheering for the same sports team). But it’s not just everyday, individual investors who fall prey to the herd mentality; it also happens to professional portfolio managers. If they own the same stocks everyone else owns, they are unlikely to be fired if the stocks go down. After all, they won’t look quite so bad compared with their peers, who will also be down. This unique situation fosters a mind-set that allows investors to be comfortable losing money as long as everyone else is losing money, too.It is not just average Janes and Joes who get caught up in the frenzy. When stocks climb, Wall Street research reports scream Buy. When stocks fall, the experts tell us to Hold when they really mean Sell. (Sell is considered impolite in the world of stocks except under the most extreme circumstances.) Everyone seems to think that they should buy stocks that are rising and sell those that are falling.

The other reason investors fall prey to the fads and follow the crowd is that investors, both individual and professional, tend to become disillusioned when the stocks they own or stock markets in general decline significantly. They end up with a bad taste in their mouths that prevents them from buying stocks while the value of their retirement funds is falling. When stocks go down, people lose money. The news – on the television, in the papers – seems all doom and gloom. Investors get scared.

However, buying stocks should not be so different from buying steak on sale or waiting for the car companies to offer special incentives. In fact, the Internet has made bargain buyers of everyone: You can buy used books from stores in the United Kingdom, computers from sellers in Canada, and jeans on sale in Japan. You don’t really care where the seller is – you just want the bargain (often found on eBay) – and in our increasingly borderless world, the “stores” you shop at are not limited to those that are a short drive away.

The same holds for stocks. The time to buy stocks is when they are on sale, and not when they are high priced because everyone wants to own them. I have been investing for myself and clients for more than 30 years, and I always try to buy stocks on sale, no matter where the sale is. Buying stocks when they are cheap has for me been the best way to grow my money. Stocks of good companies on sale reaped the highest returns. They have beaten both the market and the more glamorous and exciting issues being chatted about at cocktail parties or around the watercooler at work.

Christopher H. Brown

Excerpted with permission of the publisher John Wiley & Sons, Inc. from The Little Book of Value Investing. Copyright (c) 2006 by Christopher H. Browne.  This book is available at all bookstores, online booksellers and from the Wiley web site or call 1-800-225-5945.




Market Notes


THE MARKET DOESN’T LIKE HIGH TAXES

When Canadian finance minister John Flaherty dropped hisHalloween royalty trust bomb, he dropped a bomb on his country’s currency as well…

In simple terms, Flaherty said the Canadian government may eliminate the sweet tax breaks enjoyed by companies set up as Canadian royalty trusts. The tax hits could start in 2010… and the possibility of them has caused billions of dollars to flow out of royalty trusts.

Along with slumping commodity prices, the outflow of Canadian trust money has sent the Canadian dollar to its lowest level in a year. The hurting Canadian dollar is yet another example that investors don’t like excessive taxation… and they’re perfectly willing to leave a region that engages in it. We even read an analyst who claimed Russia has been friendlier to investors this year than Canada has. Ouch.



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