Be Happy When Stock Prices Fall (Really)

Here is a quick overview of today’s movements in the stocks I “follow” on my Seeking Alpha homepage:

sastocks

As you can see, the price of every single company that I follow went down today. For some people that try to buy a stock at $30 and sell it at $70, that is bad news. It means they are losing money.

But if you craft a long-term strategy and think like a business owner, you will develop the kind of wiring that appreciates falling stocks because it matches your goals. When I invest, I am trying to buy the most future profits (in the form of dividends and retained earnings) at the lowest price I can, adjusted for risk. I make an exception here and there to DRIP into a high quality stock, or set aside 3-5% of the portfolio for speculation, but aside from those two exceptions, that’s what I’m about.

When you can identify your long-term goal in clear terms, it allows you to view fluctuations in the marketplace with more clarity. To use a company from the list above as an example, I’ll show you what I mean with Procter & Gamble.

Going into today, Procter & Gamble traded at $77.37. Now, it trades at $76.66. The company experienced a decline of almost 1% today. Yet that decline was not due to anything that directly affected the current or future earnings power of the consumer giant. If I were setting aside, say $1,000, to invest in Procter & Gamble, the stock is a little bit more attractive and less risky than it was yesterday. Yesterday, that $1,000 would have bought you 12.92 shares of P&G that generate $51.16 in earnings and $31.08 in cash dividends that get sent your way. Today, that same $1,000 would have bought you 13.04 shares of P&G that would be generating $51.63 in annual earnings and $31.37 in cash dividends.

Sure, the difference is small, because we are only taking a snapshot of one day’s fluctuation that was not even 1%. But still, the general trend is clear: the lower price gives you more profits and dividends. People might think you’re weird or just kidding around when you say that you root for lower prices, but it is the best way to accomplish my goal of buying the most future profits at the lowest possible price. It’s about thinking like a business owner, as opposed to someone who owns a two or three letter symbol that goes up and down every day.

Warren Buffett gave a great analogy a couple years ago that explained the folly of wanting higher prices if you expect to be a net purchaser of stocks over the coming 10+ years. He said that getting excited about rising stock prices is about the same as getting excited about higher gas prices simply because you’re sitting on a full tank of gas. And Buffett got that analogy straight out of the Benjamin Graham textbook. Graham said that, all else equal, each dollar increase represents a stock becoming riskier, and each dollar decrease in share price represents a stock becoming safer because you have more of a margin of safety for things to go wrong.

And even if you are already a shareholder of P&G, it still makes sense for you to root for lower stock prices if you have the mindset of a long-term owner. Like 3/5 of the S&P 500 companies, Procter & Gamble is currently buying back its stock. Considering that earnings per share increasing at a faster rate the lower the stock price, it is in your long-term financial interest to root for a lower price for the execution of those buybacks. Also, if you choose to reinvest the dividends back into the company that pays them, it makes sense to want lower prices because your ownership stake represents more earnings and results in more dividends.

The trick is to spend your time focusing on companies that you know are so good that when they fall in price, you’ll load up the truck and buy more. Every financial advisor tells you to “buy companies you understand”, and sometimes, some bits of information get repeated so many times that we stop thinking about them when we hear them. But in my mind, that is one of the four or five most important things to keep in mind when investing. Coca-Cola is a pretty easy brand to understand. If the stock falls 30%, all you have to do is walk to a grocery store, stand in the soda aisle for a couple minutes, and watch people come by and grab Coca-Cola, Sprite, Powerade, Diet Coke, etc., and you’ll tangibly see that the business itself is humming along as always. Even during the worst of the 2008-2009 recession, Coca-Cola still achieved 25-30% returns on equity and gave shareholders a dividend hike. When you are dealing with a company of that high quality, it should be easy to load up when the price falls.

It takes some adjustment, but life gets a lot more fun when you root for lower stock prices. It’s not something you can share with your friends. They won’t understand. They’ll think you’re straight out of bizarro world. But if you want to think like an owner, and buy blocks of stock today that you intend to hold and watch compound for decades, those “red down arrows” will become your best friend.