Weekly Observations for 6/22/2018 — Opportunities for Investment

Our family arrived home this afternoon after an incredibly relaxing week at Lake Michigan, followed by a college visit for our daughter yesterday. I’ll be back at my desk early Monday morning and am eager to re-engage after a perfect reprieve!

Just before leaving last week, I entered a number of new investment positions in our custom managed accounts. The purchases were driven by one of the most advantageous features of any investment — the tendency for prices to swing up and down. While we can all wish for a linear upward path to profits, it is the periods of declining prices that create the real opportunities for wealth creation.

Let me show you one recent example.

Over the past 6 months, the price for shares of Proctor & Gamble stock has dropped 25%, taking the stock back to the same price investors were paying for the company in 2015.

Sometimes a decline like this will have an identifiable reason — perhaps an overreaction to some short-term bad news. At other times the drop will seem to have no catalyst at all. But Proctor & Gamble is an easy company for an investor to love. It’s selling for a discount to the broad market, pays a dividend of 3.8% per year, and the company produces products that we all know and use.

Once you identify a solid investment — whether that be Amazon.com fifteen years ago, real estate during the housing crisis, or a basket of consumer staples stocks today (such as Proctor & Gamble) — the greatest profits fall to those investors with the patience to wait for inevitable price declines. (Amazon stock dropped in excess of 50% on 4 separate occasions during its historic rise, and fell 94% on one of those occasions!)

A patient and disciplined investor will take advantage of such price swings to increase long-term gains and to build a margin of safety into their total portfolio. And this approach applies equally to individual stocks, whole asset classes, and fixed income securities.

For investors near or in retirement, this is accomplished with suitable cash allocations and by pairing assets that have bigger price swings with assets that have minimal price swings (see my 6/8/2018 Weekly Observations about pairing retirement assets with a bond ladder).

For investors still accumulating assets, this is accomplished when you set up an automatic monthly deposit to your 401(k) and other investment accounts — and is further enhanced when paired with an asset manager that actively capitalizes on the price swings.

More and more of these downward price opportunities are appearing in the markets during 2018 than I’ve seen in some time, and I am incredibly optimistic about the wealth building that investors will be able to accomplish in the coming years as a result.

Have a great weekend! I’m looking forward to Monday.

Sincerely,
Kenneth