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October, 2017


A recent article, "Stock Market Retreats and Recoveries," by Sam Stovall, October, 2017, in AAII Journal, the monthly publication of the American Association of Individual Investors, points out that since the end of World War II there have been 89 U.S. S&P 500 Index stock market dips of 5% or greater, roughly one every 10 months, each averaging 7% or more. While some might view this as reason to find investing in equities too risky, Mr. Stovall sees great and frequent opportunities. Imagine, if every several months one's employer would put an extra 7% into employees' 401k accounts, how this might increase people's financial independence over the course of a career. That, substantially, could be the result if investors were willing to hold off on new investing till these dips are underway, then buy additional shares after the average market drop level of 7% has occurred. Instead, what typically happens is that investors give way to their fears, jumping out of stocks when they start heading down and not buying back in till share prices are well on their way back up, in effect selling low and buying high. No wonder the average individual investor gets returns significantly worse than those of the market.

Mr. Stovall offers us a better way. He notes that more than 85% of the time dips of 5% or more are followed by rapid gains, getting prices back to breakeven or above in a mere four months or less. Pick some preferable assets, ones likely to have lower risk and higher prospects than the market as a whole. Hold them indefinitely, what Warren Buffett likes to call "forever." An example of such winning securities might be Buffett's own company shares, BRK/A or BRK/B. Then, every time the stock market falls 7% or more, buy extra shares of these favored assets. Each set of purchases assures getting desirable fractions of superior businesses at bargain prices. If we go shopping at a supermarket and see our favorite loaves of bread on sale, $1.86 today instead of the regular $2.00, are we going to pass on that part of our shopping lists because it now costs less than expected? Of course not. I for one would promptly drop the favorite bread into my basket, pleased to have saved 7%. In the stock market, such savings mean that for the same amount of money I can buy more of my most loved stocks' shares. Mr. Stovall is not big on market timing, the attempt to buy or sell based on what we think the market is going to do. Such behavior based on forecasting seldom works. He points out, however, that investors can look as if they are fabulous at timing the market by simply purchasing once the market has already reduced the prices of selected stocks for us by at least 7%.

There are a couple or three ways we could make this historical market volatility work for us. Though for various reasons it is not particularly recommended, short-term investors could buy "swing-trade" stocks on the 7%+ dips, then sell once the market has raised share prices back up above breakeven, maybe with gains, for instance, of 8, 10, 15% or beyond each time there is a new dip and surge cycle.

Good Stocks for Equity Dips

McKesson Corp.MCK$146.210.76%
Schlumberger, Ltd.SLB$65.913.01%
Total, S.A.TOT$54.034.95%

Alternatively, we could do as Mr. Stovall specifically suggests and buy shares of exchange traded funds (ETFs) for the equal-weighted S&P 500 Index or the S&P SmallCap 600 Index when their respective indexes have fallen 7% or more. Left untouched through the years, the accumulated extra shares will offer us a nice premium in added value compared with having bought instead at the average costs for these ETFs. What is more, they tend to recover more quickly than the more popular Cap-Weighted S&P 500 Index. Available ETFs for this purpose are: Guggenheim S&P 500 Equal Weight ETF (RSP) and Vanguard S&P Small-Cap 600 ETF (VIOO).

A final strategy for discussion here is my favored method, buying shares of excellent companies with good long-term prospects, when they are down along with the rest of the market, then holding them awhile for very nice long-term gains. Which companies would be better to use for this technique of course may vary over time. Some will improve while others might decline in their growth potentials. Yet with a little research it ought to be possible at each market dip of 7% or greater to select ones that look good for at least the next few years. At the table above are three of my own choices in case of a market drop of 7% or more in the next few months. As it has been more than 10 months since the last dip of at least 7%, we are in a sense overdue for another one. It may thus be high time to select one's assets to buy when the next such opportunity presents itself.

Happy bargain hunting and buying over the months and years ahead!


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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