Why Does Everybody Love a Sale Except When it’s the Stock Market?

The peculiarity of most people is perhaps no more apparent than how they deal with money.  I find that one of the funniest phenomenons is that of the idea that you’re “saving money” by buying something on sale.  A person might drop $1,000 on a new T.V. that’s on sale, for example, but be more excited by the fact that the regular price was $1,300 and therefore claim that they “saved” $300.  No, they actually didn’t save a single dollar – they just spent one thousand of them!  However, so few people seem to see things this way when it comes to retail spending.

Retailers have most people brain-washed into thinking that spending is actually saving and therefore people from all walks of life don’t get much more excited than when things are on a huge sale.  The most mild-mannered of people can get as excited as a school-kid on a sugar high when an online or in-store search results in finding something (often that they don’t actually need) that’s selling for a major discount.

Contrast these ordinarily mild-mannered people with what happens when they learn about the stock market taking a dive and they happen to be invested in some mutual funds, perhaps a stock or two.  All of a sudden, their heart might race and they might experience a mild or even major sense of panic.  Some of the most extreme reactions might revolve around thinking that their entire retirement has gone up in smoke, resulting in selling at a loss or getting out of investing in anything altogether, concluding falsely that it’s only ever a losing game.

As I’ve mentioned in several of my more recent posts, people’s mistrust or outright fear of the stock market is solely due to ignorance:  by not understanding what it is or why it does what it does, panic is a natural reaction when things don’t look so good.

However, investors like me who’ve sought to understand not only what the stock market is but also how it behaves and why actually get excited when the market takes a dip.  Like the person doing cartwheels over seeing one of their favorite things on sale at a store, a market dip means a chance to buy a company that I’ve been following at a discount, sometimes a very big discount.  A company’s stock price dropping in value 25% or sometimes even over 50%, when that drop is due only to some geopolitical event or irrational economic fears, represents an amazing buying opportunity if that company and stock is a strong performer when everybody’s happy and the economy is merrily chugging along.

A great sort of company to buy on a dip is a railroad like Canadian National Railway or Union Pacific Corporation.  These railroad companies not only form the economic backbone in the United States and Canada, respectively, but they are among the best-managed railroad companies in the world.  Also, since there is currently no foreseeable disruptive technology that could take the place of railroads, the best-run companies like the ones mentioned are a good place to park some of your investment money over the next several years.  However, they have the tendency every several years to go through a year or so of a downturn, often in conjunction with the health of the economy.  Therefore, a great time to buy their stock is when it doesn’t make sense, like when they’re down over 25% from a previous high and the price seems almost unbelievably low and everybody thinks you should only sell instead of buy the stock.  Since nobody can predict when a price will hit bottom, the best time to buy is soon after the economy starts to pick up again (which it always does) and the stock’s price has been moving steadily upward from the bottom.

An investor with a long-term perspective, which is at least 3 to 5 years, has no problem if they already own a stock like this and it takes a 25% or more dip.  Either they ride it out and don’t sell, knowing that it will be higher than the previous high in the next few years, or they get smart and buy even more of that company’s stock during a dip in its price.  Some people don’t realize that you can buy a certain stock more than once, and buying it on dips is a way to keep your initial costs low and increase the chance of having higher long-term returns.

An investor with a short-term perspective, however, is often the ignorant investor that I described above.  A 25% dip to them is often met with an end-of-the-world reaction, again often resulting in selling during the dip or vowing never again to invest in anything.  Then after several years roll by, they might come across the stock’s price one day and notice that it is double or several times what they sold it at and curse their ‘bad luck’ instead of realizing that it was their ignorance and impatience that caused 1) their initial loss and 2) missing out on fantastic, long term returns.

So the next time the stock market ‘goes on sale,’ I hope that you will understand why it’s more important to see a blessing where most people see a curse, to see an opportunity to gain where most people only see loss.

If you’re a brand-new stock investor – or still thinking about it – then I highly recommend the free e-book, Should You Consider Stock Investing?  It could become one of the most beneficial 30-minute reads of your life.

One last thing:  be sure to click the Follow button near the top of this page on desktop or after this post on mobile.  (I don’t post regularly because I believe in quality over quantity, so keep an eye on your Inbox.)

To new beginnings!

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