One of Warren Buffett’s classic investing rules is to be fearful when others are greedy and to be greedy when others are fearful.
Fear is rampant today, but the word we’re hearing from portfolio managers is to be fearful, not greedy. The cliche you hear when stocks fall: “Don’t try to catch a falling knife.”
To state the obvious, stocks are the falling knife here. If you grab some up, prepare for the possibility of more losses.
There is no point arguing with this line of reasoning, given the chaotic state of things in Washington. What we know is that a global trade war has started, and that U.S. President Donald Trump seems OK with plunging stocks, the potential for rising inflation and a growing consensus that a recession could be ahead. Mr. Trump may buckle at some point on tariffs, but how much damage to the global economy will have occurred by then?
The question the “don’t catch a falling knife” crowd never seems to answer is exactly when you’re supposed to start buying stocks. Market bottoms are only seen in retrospect, and they often occur after a brutal spasm of selling. You might be too scared to buy at the perfect moment.
One solution is to wait until clear evidence of a stock market rally to start buying. But if you do this, you could easily miss a good chunk of the rally. Another thought is to reach out and catch that falling knife – carefully.
You do this not with a big, bold purchase, but rather with small bites. One strategy is to buy on days when stocks are down sharply, say 2 to 5 per cent or more. The darker the day, the more interesting stocks look.
Do not buy stocks or funds in a falling market unless you’re willing to endure further declines. You’re building a position for the long term with small buys in a falling market, not going for a quick score. It could easily take a year or two or three, maybe longer, for stocks bought today to move decisively into the black.
Two recent developments in DIY investing have opened the door for investors to nibble at falling markets - the rise of zero-commission trading, and the availability of fractional shares. Fractional shares, available from Questrade, Wealthsimple, Interactive Brokers, TD Direct Investing and the TD Easy Trade app, allow you to invest any amount of money in a stock purchase. You can buy less than a share, or odd amounts like 1.5 or 11.8 shares.
One further thought on buying beaten down stocks is to focus on quality. The speculative themes that did well in the market run-up of recent cannot be relied upon to rebound quickly. In an uncertain world, proven companies rule.