Saturday, July 22, 2017

Dead Cat Bounce

When something goes down in value, particularly for emotional reasons, chances are it will go back up.  Ditto for when things go up for emotional reasons.

A reader writes, asking me if I think it is a good deal to invest in Lowes Stock.   I do not give stock tips here, or engage in stock-picking.  I do buy and HOLD stocks, not day-trade or churn my own account.   But when I see a stock I think will do well for the long haul (years not months) and the price is artificially low, well, I buy it.

And the other day, when I saw these ridiculous stories about how Amazon is going to take over the Appliance Business because Sears decided to list a few washers and dryers on Amazon's e-Bay like site, it seemed like a good time to buy.   The market is stampeded by stories about Amazon, which is helped by the fact that Amazon owns one of the nation's largest newspapers.    So stories about Amazon "taking over" the appliance business from Lowes and Home Depot and Best Buy seemed a little far-fetched to me.

Besides, Lowes is more than appliances, which make up only 11% of its business.  They could exit that sector entirely and while it would hurt them a lot (it is a good mark-up, particularly the upper-end crap) they would still soldier on with lawn and garden (try getting your petunias and mulch delivered by drone - or UPS!) lumber, plumbing, and whatnot.

And granted, the "big box" stores have a lot to lose here.   I bought my LED light bulbs online, and yes, from Amazon, rather than buy them at Lowes, because it was far cheaper to buy them online.  However, how long these no-name Chinese bulbs last, is not clear.  And one set I bought was not dimmable.   Sometimes it is good to touch and feel the goods and buy brand names.   One set I did buy at Lowes did fail early - and I was able to take them back easily.   Brick and Mortar still has some legs left in it, if managed properly.

Anyway, after Lowes stock lost 5% in value from this Amazon "announcement" about Sears, I bought the stock and the next day, it went up 1.5%.  Now, that is an annualized rate of return of over 500%.   What this means, of course, is that a lot of people like myself, pulled back and realized that Chicken Little was once again running the stock market, but no, the sky wasn't falling quite yet.

Even dead cats bounce when you drop them.

Of course, I only bought about $3000 of the stock which is feasible in an era of free trades.   So if, by some far chance, Lowes goes bankrupt tomorrow and lumber starts droning its way across the causeway to my home, I don't lose a lot of money.  But somehow, I don't think that will happen.  And even if the stock goes down, I still have my dividends to comfort me.

Others take a different approach.   I see a lot of young people who "invest" by spending $1000 here or $10,000 there on something they heard about online or on the financial channels.   They don't have a lot of money to invest, and they aren't investing, but gambling - hoping to place a bet in the stock market and then clean up.   I tried that when I was young - it didn't work at all.

So you read online on a discussion group, a comment from a 20-something about how he put down $500 on the Groupon IPO.   But he wasn't "investing" - he was gambling $500.   Or another fellow who decides to throw $1000 at gold, because he heard good things about it.  Or these kids (65,000 of them!) who paid $1000 for a non-refundable deposit on a car that doesn't exist and never will.   You can buy a nice used car for not a lot more than that, you know.  At least it exists.

These people say, "Well, it's not that much money, and I can afford to lose it!" which really isn't true.  Hundreds or thousands of dollars is a lot of money, and while I can afford to lose it (and indeed, at this point in my life, my portfolio can gain or lose the cost of a new car, on a daily basis) someone in their 20's really can't, unless they are a Billionaire wunderkind.

And that, in a nutshell is how a lot of these "dot com" companies work.   They hope that thousands and maybe millions of the plebes each will chip in a little bit, on the premise they might hit it big investing in "the next big thing!" (which by the way, is literally the trademark of Elio).

Think about it.  There are 330 million people in the United States alone.  If you could get each one to give you a dollar, you'd be rich.   And each person can "afford" to lose a buck, right?   That basically is the business model of the modern dot-com "tech that is not tech" company.   Get a whole bunch of people to give a little each.  This is how crowdfunding works, and yea, it too is a bad idea.

But hey, it worked for Obama!  Too bad Hillary didn't try it.  You see, once people send in $10 to a candidate, they feel invested and are more likely to vote.   Big money from Hollywood and George Soros is fine and all, but it doesn't get out the vote.   Trump won because he sold MAGA hats, and with each purchase, he got a guaranteed vote.   But I digress....

So what is the point of all this?   Well, at least for me personally, my net worth didn't start going up until I started adopting a more mature adult form of investing.   When I started out, I thought I could "beat the market" by buying and selling stocks strategically.   I kept looking for "the next big thing!" and used the financial media as an information resource.   I found "the next big thing!" of course - and so did 330 million other people.    I bought high and sold low.   It was idiotic.

I finally grew up and realized that I wasn't going to beat the market, that I wasn't some financial boy-genius who was going to stock-pick his way to the top.   I realized that a better alternative for the amateur investor was to diversify my portfolio among a plethora of things - stocks, bonds, government bonds, mutual funds, insurance, and real estate.

I also realized that losing money was part of the game, at least some of the time.  And I realized that the idea that I would pick investments that would always go up in value (because I was such a smarty-pants, right?) was idiotic.   Things go up, and then they go down.   And the one huge mistake I didn't make was to dump investments in a panic when they went down - as a lot of people did in February of 2009.

And it may seem non-intuitive, but once I stopped looking for "The Next Big Thing!" and quick and easy profits, I started to make real money investing.   What it took was not more effort, but less.   Not more thinking but less thinking.   Not trying to score big, but just putting money away, diversifying and.... waiting.

That's all it takes.   If you try to "beat the system" the system will beat you.