Based solely on the number of new stocks I am finding to be priced at bargain levels, one would think the U.S. stock market has broken its years-long streak of avoiding a 10% correction. My potential buy list of stocks has not been this full in a long time, even though the S&P 500 (trading at 2,050 right now) has only dropped 4% from its all-time high. The reason is that as the current bull market continues to age, it is being led by fewer and fewer companies. Take out some high fliers like Amazon (AMZN) and Netflix (NFLX) and the underlying performance of the market overall has been pretty weak this year, and this is causing individual stock pickers to have ample choices when allocating fresh investment capital.
Take Disney (DIS), as an example. Down $6 today alone, the stock now fetches $100 per share, versus the $122 new high it reached on August 4th, just 16 days ago. For a blue chip company like Disney, which was a market darling just weeks ago, to be down 18% from its high is pretty remarkable. These are the kinds of moves we typically see when the market indices are really taking it on the chin.
It is impossible to know if the high-fliers are going to keep the S&P 500 fairly buoyant, or if we really will see a normal correction in the market (which would have to take stock prices materially lower from here), but as a long-term investor I do not especially care either way. I tell my clients that I invest in companies with every intention of holding them for at least five years. There are certainly times when I sell before that, but when you are searching for contrarian bargain opportunities you want to have time on your side since investors’ daily emotions are so unpredictable and oftentimes irrational. So when I find great investment opportunities, as I am more and more these days, I do not hesitate to start accumulating shares, even though the market is overdue for a correction and only down 4% from its high. If my investment thesis is correct, and I am willing to hold the stock for five years, the short-term noise becomes irrelevant.
As you consider whether to add fresh money to your investment accounts (and when), keep that in mind. Buying a good company at a great price usually pays off very well for long-term investors, in any market environment. Assuming that environment is similar to today when I write my next quarterly client letter in early October, I am likely to encourage my long-term investor clients who are still regularly adding cash to their accounts to prepare a plan of attack. That might mean putting some money to work now and leaving some on the sidelines in case we get a bigger market drop, but at the very least I think we should be shaping our plans around what we are seeing out there right now. And I would characterize the market today as getting very interesting on a stock specific level, provided one has patience and is focused on company fundamentals and not day-to-day market noise.
Full Disclosure: Long AMZN, DIS, and NFLX at the time of writing, but positions may change at any time.