When you break down the performance of the stock markets over a very short period of time, you can conclude that the markets are very volatile. The markets can go up and down depending on the daily news. Just for fun, let’s look at some possible news headlines you may come across.
Headlines that almost always cause a drop in the stock markets
“Job number was worst last month than the previous month”
“Consumer spending was down 5% last month”
“Housing sale dropped by 10% month to month”
“North Korea to start missile exercises in Pacific Ocean”
“Greece faces yet another potential bankruptcy”
Headlines that almost always cause a jump in the stock market
“Consumer spending increased by 10% last month”
“Feds to continue stimulating the economy by buying $1 billion dollar worth of bond each month”
“Underemployment rate decreased by 5% month over month”
“Just Bieber to give up on singing career to become a Catholic priest” -> Please let this come true haha!
Most of these headlines, if not all, should be considered as noise. For a long term investor, we should ignore these noise and continue with our investment strategies. For me, when the stock markets drop I’m looking for opportunities to increase our dividend portfolio. Big name, well run, profitable international companies like Coca Cola (KO), Johnson & Johnson (JNJ), Protector & Gamble (PG), and McDonald’s (MCD) do not all of a sudden become worthless junks just because poor job number results or poor housing sale numbers. The stock price may get dragged down by the overall market but if the companies are still profitable and well-run, this will be a little blip on the stock chart in the long run.
Here’s a great tip for long term investors – buying stocks on pullbacks. When the stock price drops over a short period of time, we refer to this as a stock pullback. When a profitable and well-run company’s stock price all of a sudden pulls back by 5%, 10% or more, this can be a very good opportunity to become part owner of the company. Just because others are fearful and selling the stock, it doesn’t mean you need to follow the masses. Look at the big picture, is this company still profitable? Can the company increase its earning per share (EPS) over the next 5 years? What is the company’s future growth potentials? Did the recent earnings meet the expectation? If not, what caused the lower than expected results? Is it because the overall market or economy? Or is the company becoming less efficient at making money for its investors? We must evaluate all these factors to determine if the company can continue delivering profits in the future and whether we can invest in this particular company.
Typically these potential “great” stocks are on your watch list already, so you’re just monitoring for a good entry point. A 10% stock pullback may be an excellent way to enter and buy some stocks on sale.
Having said all that, buying stocks on a pullback doesn’t always guarantee good returns. You need to do your homework in evaluating stocks on your watch list. If you fail to do your homework, you’ll end up with something that may continue to drop in price. This certainly isn’t a great investment strategy.
Do your homework, monitor stocks of great-run companies, then consider buying them during stock pullback. This is a simple concept but not easy to execute.
37 thoughts on “Buying stocks on pullbacks”
I wonder if the same approach (“buying stocks on pullbacks”) can be applied to most ETF/Mutual Funds as well. It is much more difficult to determine the future prospect an particular fund in comparison to an individual stock.
You could certainly apply this with ETF. Mutual funds might be harder to pull off since there’s quite a bit of delays on initiate a purchase and an actual purchase.
I was just thinking about this the other day when one of my stocks was downgraded and it dropped a bit. The analyst was citing next quarter and all I could think is – who gives a shit? I am going to own this thing for years if not longer!
Owning it long term is totally the way to go Evan.
Would you consider buying American Express right now? They dropped 10 percent not too while ago on the news that Costco is dropping them and going with Mastercard.
Hi Financial Underdog,
That’s an interesting question. American Express’ has been increasing dividend quite significantly but the dividend yield is pretty low. As a consumer who uses credit cards regularly I would never apply for an American Express card. This is simply due to the limited coverage for American Express. So I would make the conclusion that American Express’ customer base is not as great compare to V or MA. For this reason alone I would not own the stock.
Yup, I just checked – the yield isn’t nothing to write home about.
I do love thinking contrary to what the market does, and buying on pull-back fits that perfectly. Currently I’m eyeing some oil producing companies – they have been going through a nasty ride. But oil prices won’t stay low forever, so it might be a good way to go.
I bought Johnson & Johnson, Exxon, and IBM all after big drops recently. I wanted to buy Lumber Liquidators too, but I was on vacation and didn’t pull the trigger. The drop is almost never related to the health of the business, but more of a market reaction to news (whether its important news or not).
If the drop is related to the health of the business that’s when you need to stay away from the company. If the drop is related to a market reaction to news or overall market performance, typically it’s fine buying blue chip stocks.
I agree, it makes sense to do that when you can and when the opportunity arises. Naturally, you added the correct disclaimer that requires doing your homework. Similarly, I am looking at KO of late – their value is starting to head into the proverbial sweet spot.
Also where did you get that picture? I hope that is either Chris Kattan or his stock broker doppelganger.
– Dividend Gremlin
Hi Dividend Gremlin,
I found that picture via Google Search. You definitely need to do your homework prior to buying a stock. KO is a solid pick I think.
I just made a bunch of purchases during the last pull back. This is one of the reasons why it is always good to have a little extra cash on the side. I am hoping for another slight pull back so I can repeat the process of buying during pull backs.
It’s definitely a good idea to have a little extra cash on the side but you need to determine how much cash reserve you want to keep. The last thing you want to do is keeping too much cash for too long. 🙂
Buying on pullbacks is my favorite strategy. It is extremely easy and simple yet so many people do not utilize. I gotta admit that I like pullbacks but I love crash. I am thinking of reserving cash lately for potential crash. There are so many signs out there lately.
There are certainly many signs on a potential crash but people have been saying this for years now. The crude oil price drop is kind of like a mini crash to allow us to buy oil & gas sector stocks on a discount.
You said it best. Evaluate good companies. Buy if you think there is value to be had – even if that means the stock was up 20% this year or down 20% this year — all about if you think they are a great, sound, fundamentally strong company. “Nuff said”
Totally correct Lanny. It’s all about the fundamentals and making sure the company has strong future growth.
Forget pullbacks…I’m waiting for a crash 🙂
I know you are too!
Good post and keeping things (U.S. multinationals) in perspective.
Lol Mark, I’m wishing for a major crash like 2008-2009. Wish I had taken more advantage of that crash.
I think the key to trading pullback again is selecting the right stocks to trade pullbacks on. We know that there are stocks like momentum stocks or growth stocks which are best traded using breakout methods. Right? these are prone to sudden burst of momentum phases that can go vertical without any pullbacks.
Very good point on picking the right stocks. That’s why picking blue chip dividend stocks is generally OK because these stocks are pretty solid. Picking hyped stocks like Facebook or Twitter or GoPro you might see a different result.
Good advice Mr Tawcan. I also like buying stocks after they go ex-div, because they usually go down in price as less people are buying to lock in the next dividend payment.
Great idea on buying stocks on ex-div. Price will drop on that date, allowing you to buy at a slight discount.
Great advice. Over the long term, strong blue chip companies will overcome the bumps and pullbacks give you an opportunity to buy a great company at a discount.
Exactly, a 10% drop over a month is nothing when the stock gains for 200% over the next 5 years. Look at the big picture.
I love the market pullbacks, not only to re-invest in the stock we have in our portfolio but as well to make capital gain, which is the mix strategy that we are using (dividend and capital gain).
Looking for the next one!
We’re also waiting for the next pull back too. I like small pullbacks too because this allows us to DRIP at a lower cost.
Being an index fund investor individual stock pull backs do very little but when the overall market experiences a pull back I do thoroughly enjoy deploying fresh capital to take advantage of the buying opportunity. The whole time having a shagrin knowing I just improved my long term investment results.
I also strongly second this “Just Bieber to give up on singing career to become a Catholic priest”
You’re right that index funds will only drop when the overall market experiences a pull back but that also provides a good opportunity to add more shares of the index fund.
The Justin Bieber headline was hilarious because it could be so true! Excellent point Tawcan. I like the 10% pull back rule. It lets you know how much you can potentially earn on returns. However, sometimes one could also wait forever for the 10% discount.
Glad to hear you like the Justin Bieber headline. You can sometimes wait forever for the 10% discount so maybe depending on the situation you need to adjust that number. Maybe 5% is acceptable from time to time.
I read your headlines recap, made sense, made sense, …. Then I get to Justin a bieber become a priest thing… Hahaha
DOW was in red in triple digit today, then rebound to triple digit in black. Come on! Hehe you can’t never able to time the market. I expect oil to go down, Cramer got it wrong when he made the bold move. But regardless, the 6% dividend payout from BP looks so good.
I see people start investing stock that have high PE when banks have 8-12 PE, which doesn’t make any sense at all. Nobody look at fundamental anymore? Yet again, MA or V. TROW PE have PE way above the financial industry, yet they are the street’s darling because they raise dividend payout every year. I’m just slowly learning about this whole dividend growth business. It’s mad!
Glad to hear that you laughed at the Bieber headline. 😀 Looking at the fundamentals is important when it comes to investing. MA and V have higher PE ratio because people are quite high on these stocks. They have been growing dividends at a very high rate.
You are right about the pullbacks being opportunities. One of the reasons I like investing weekly is I don’t freak out about sudden prices drops because I can always average down the following week. Plus as an investor seeing the price ebb and flows removes some of the fear and self doubt.
If I had some additional capital, I would have added to KO today below $40 or PM around $76. Five years from now both will continue selling their products and paying ever increasing dividends.
Buying regularly is definitely a great way to avoid major freak out on sudden price drops. You’re also taking advantage of dollar cost average as well.
Thank you for the article Tawcan. I love pullbacks. Always on the lookout for pullbacks to deploy our hard earned cash. Just a couple of companies which are always so damn expensive like Nestle. I wish I bought Disney last year. Ah well. Next pullback :). Take care bud.
There are a few stocks that I wish we purchased years ago… but you can’t always look at the rear view mirror.