Harnessing your deal hunting skills to score investment bargains

Ah, January! The month of sales. The shop windows are all advertising 60 and 70 percent off. I get daily emails filled with deals on everything from apparel to car parts. Who doesn’t love a sale? They can dramatically shift the value equation—getting more stuff for less money. We as Americans have become highly skilled at navigating the retail system to score big bargains. My husband came home from the grocery store the other day on a value high after a particularly successful hunt: he purchased Italian sausage that was not only on special by the manufacturer for 20% off, but the store was offering an additional 30% discount, and, because the sausage was close its expiration date, the manager tagged it with a $2 off at the register coupon. Wow! I felt like the store was going to pay him to take the sausage.

As a fee-only financial advisor I have noticed that unlike the supermarket, the allure of a sale does not apply to the financial markets for some reason. When the stock market is offering “door busters” nobody is trampling the security guards to be the first one in. And, when the doors do open, most people walk by the great value sausage stocks, choosing instead to pay a premium for others. In fact, it is worse: instead of rushing to buy stocks that are undervalued, people tend to sell. Investors end up having bought high and sold low—the opposite of their original intent. History has shown us that the stock market is incredibly resilient. Almost the opposite of Newton’s Law, “Investor’s Law” is more like what goes down, must come up. While certainly not true 100% of the time, canny investors who embrace this principle are often handsomely rewarded.

All those who panicked and sold their equity positions when the market tanked in 2008 made the fatal mistake of abandoning the market at its low point. What they should have been doing is thinking about Investor’s Law and gathering up the stocks that were now on sale at 20%-30%-40% off! These stocks were a great value. I have made my fair share of market errors, but I would like to use my husband’s personal experience as an example.

Should the Bureau of Securities be reading this I would like to point out that this is not specific investment advice. This example is for your education purposes only. (This is the equivalent of the “Do not try this at home” disclaimer.)

In 2008 when the sub prime meltdown led to the collapse of the stock market, my husband was thinking about Investor’s Law. Ah-ha! What comes down must go up. He looked at the market and thought about what stocks he thought held value at their pre-drop prices. With that in mind he excitedly scooped up Apple, Bank of America, GE, JP Morgan, and Goldman Sachs. I don’t remember the exact prices he paid, but he later sold the positions and doubled his money.

Next time the stock market drops precipitously I invite you to remember Investor’s Law. Do not panic and sell your positions at the market lows! Hang in there and consider taking advantage of the “January” sale opportunity to pick up a couple of investments (stocks, indexed funds, etc.) that are undervalued. Instead of feeling betrayed by the market when it rises after your sale, you will feel triumphant having gotten a valuable deal. You will be as giddy as my husband was leaving the grocery store with his 75% off sausage.