Few things in life elicit pure, unbridled euphoria in me more than finding a spectacular discount at the Pink Palm (a Lilly Pulitzer boutique). The collections are always whimsical, yet classic and, as far as I am concerned, epitomize easy, lovely, elegance. Suffice it to say, I’m a fan! Since the new spring collection came out a couple months ago, I’ve been dreaming about these nautical looking white pants and navy top with---wait for it---puff sleeves!! But, as is the case with most of us these days, I’m definitely tightening the belt a bit. As such, for 8 weeks and counting, I had been using herculean restraint and just ogled them from afar. This weekend, however, I was perusing another local Lilly boutique and found both the pants AND puffy shirt for 30% off the original price! CLUTCH! Both now comfortably reside in their new home on hangars in my closet!
Driving home, I started thinking about the stock market and how my new Lilly duds were kind of like a lot of stocks right now. The outfit was the exact same brand, quality and size when I bought it as it was when I first saw it 2 months ago. The only difference was the price. That’s it. When the price was reduced, I was in! The clothes were the exact same at both prices, but at a 30% discount, I would say, I got a heck of a deal!
There’s a ton of opportunity to find “deals” like that in the stock market too. A lot of great companies are “on sale” right now. There are amazingly solid, publicly traded companies in the marketplace that are majorly on sale by virtue of the overall decline in investor confidence in equities. They are still the same fundamentally sound businesses that they were when the markets were soaring a couple years ago, but now, you can just get them on sale! The way I see it is this, if you are investing for the long term (read that to mean ten years or more), there is no reason you should not have at least some exposure to the equity (stock) market. Assuredly, there are some bad, bad, bad companies out there, but there are also some really good companies that are just selling at a really deep discount. The hard part is distinguishing the out of favor, “value,” stocks (good companies) from the truly rotten investments (fundamentally flawed companies).
How do you know the difference? First and foremost, you need to remember that investing in a stock should not be approached like a Vegas gamble. An equity investment is an actual ownership stake in a company, not some random number on a roulette wheel. Investing shouldn’t be approached haphazardly like a game of chance. You should take it for what it is. If you are buying stock, you should look at it from the perspective of someone who is giving their money to a company and intrusting that company to be a prudent steward and make your investment profitable. With that said, you need to think about the likelihood that management can make that happen. You should look at the company from all angles. Here are some questions to ponder when you are thinking about buying stock:
- What industry is the company in? (What kind of business do they do?) The industry can have a huge impact on the viability of a company’s short and long term success. It is important to really understand the industry so that you can have a grasp of the potential industry risks that can have a negative impact on an otherwise solid company. My rule of thumb is: Stick with what you know! It is no coincidence that I research domestic retail positions!
- Who are likely to be their customers?
- Are those customers likely to use substantially less of the company’s products or services during rough economic times?
- How is the company positioned to be innovative and profitable over the next 10 years? (Check out the product/services pipeline as a starting point to figure that out)
- How is the company run? Who are the executives? How long have they been there?
- How much debt does the company have?
- Is the company profitable now? Has it maintained profitability over time and through various economic environments?
These questions are just to get you started. The best thing you can possibly do in this environment is work with an advisor to help you capitalize on the discounts that are out there, not to mention, keep you from shooting yourself in the foot by taking on investments that don’t match up with what you want your money to do for you. I say all of that with the caveat that your financial professional should not be a crutch. Even though you should ALWAYS work with someone that has a fiduciary responsibility to you to understand this stuff , you should also be very educated about what you own, why you bought it, why you own it, and what would be the catalyst for you to sell it. Always be aware of your investments and be able to confidently articulate what your long term strategy is and why it is set up the way it is.