As I mentioned in my post about the purchase, the stock's price has been declining this year (despite no bad news or change in the company's fundamentals), so I felt compelled to take advantage of it being "on sale." Little did I know that the very next day (today) the market would see its biggest one-day loss thus far in 2012 and NSC would go down another 2.6%.
It is easy to get upset when this happens and I'll admit that I was a bit frustrated. However, at times like this I find it helpful to remind myself of the following points:
- Short-term price fluctuations are essentially impossible to predict, which is why market timing rarely works. I could not have predicted that the price would drop 2.6% today, so there is little sense in getting frustrated about it.
- My purchase price was a price at which I deemed I was getting a good stock at a good value, and that remains true. How would I have felt if the price had shot up and I had missed the opportunity to buy the stock when it was on sale? Indeed, I missed plenty of great buying opportunities last fall that would have led to double-digit gains by this time.
- If the price continues to fall, then I will have the opportunity to buy the stock at an even greater discount. (Whether I do will depend on the availability of cash and how much larger I am willing to make my position.)
- The purchase is intended as a long-term investment, so years from now I will not care about a price difference of a few percentage points.
- The price difference amounts to about $30, which is trivial relative to the size of my position and the rest of my portfolio. Moreover, I've spent $30 countless times on far less important things in my life -- and none of those things paid dividends.
- My primary investing goal is to create a sustainable, rising stream of dividend income, and my purchase is entirely consistent with that goal.
You'll run into this many times throughout your investment career, and I've already run into this situation a few times so far in my relatively short run in the stock market.
I think you said it best when you compared the dip in market value to a purchase you otherwise could have made on a useless object that has no long-term value. I do the same exact thing when I see a recent position decline in value by $30-40. I think, well I could have spent that $30 on an item or experience but the money would still be gone either way and the item or experience I would have purchased will likely have no chance of appreciation and most certainly will not pay dividends.
I try to remember that the market is the sea, and I'm just a cork floating along. The sea rises and falls, ebbs and flows...but I'll just continue floating along trying to buy on the dips and hold at the top...but you can't control the waves.
It's great that you're keeping perspective my friend.
Hi Dividend Mantra,Delete
I like your sea analogy. Market fluctuations are indeed like waves that you can't control -- you just need to ride them out.
No doubt I'll have similar experiences again, so if I learn how to deal with them now, they won't affect me as much in the future. I guess you could say I am getting my sea legs. :)
I hear you. Don't beat yourself up over price movements you can't control. It's unreasonable to think you will always buy at the right time and always pick winners. If anyone has a crystal ball that can predict future stock prices let me know where to get one.ReplyDelete
My understanding of NSC is that this year's warm winter has reduced the demand for coal at power plants. NSC transports a lot of coal. Also the price of natural gas is very very cheap, so utility companies might use their cheap gas powered plants before coal power. I agree that long term NSC should be just fine. We might have a scortcher of a summer and see a runup, who knows? I own NSC and am tempted to pick up more.
Take it easy.
Hi Compounding Income,Delete
Exactly -- I don't have a crystal ball, so there's not much point in getting upset over market timing.
The weak coal demand and low natural gas prices have probably contributed to the price decline we've seen for NSC this year, but we won't know the actual impact on the company's earnings for a while yet. However, even if the company's growth is slower than expected, I think it will still do well, especially in the long run.
Deedubs, you bring up a point that is rarely discussed by investors, but always present: the psychological aspect. Our actions or inactions are always causing us to doubt are choices. Behavioral finance is a fascinating field to me. I've been reading about loss aversion lately and how we experience loss far more strongly than we experience gain. This can really mess with an investors frame of mind if he/she is unaware of the phenomenon. Being aware makes us so much more prepared to handle market fluctuations.ReplyDelete
Bullet-point four is strongest in my book. If you look at your investing in terms of decades and not weeks or years you will do just fine. Thanks for sharing.
Indeed, I think psychology plays a major role in investing, but one that is rarely discussed. I have read a bit here and there about behavioral finance and I agree that it is fascinating. It is definitely a topic that I plan to learn more about and write about on this blog.
A long-term view is critical to investing success. I think a focus on the short term is what causes a lot of investors to lose money -- they sell out when a company has a bad quarter or suffers a minor setback, not recognizing that the longer-term prospects remain strong. Taking a step back to look at what might happen years down the road is always a good move.
Thanks for your comment!
Hi Deedubs, I just recently found your blog and like what I've read.ReplyDelete
I think one problem many people have is they try to measure success or failure against "the market". If they see one of the major market indexes gaining more than their investments did, they are a failure. If they luck out and earn a little more than the index(es) they follow, they are a success.
I prefer to measure my success against personal goals. I have worked out a plan that will help me get to where I'd feel that I can retire and live comfortably. To reach that goal, I want to increase the value of my investments by a certain percentage every year. Of course that increase includes not just what I earn on my investments, but also any money I contribute as well as the matching funds that my employer contributes in my 401k.
As long as I am "ahead" of the plan, I don't find myself worrying over the occasional drop in some of my investments. If there is a wide-scale drop in the market, I usually start looking around to see if some of the potential investments I've had my eye on are starting to look like good "sale prices".
At the end of the day I don't feel that I need to earn a higher return than anyone else. I just need to keep up with (or ahead of) where my plan shows I should be, and then I am satisfied because I know that I am on track for reaching my goal.
Thanks for your comment. I especially like your point about measuring success or failure against personal goals instead of the market. That is what I try to do by setting annual goals for dividend income and savings. If I can achieve those personal goals, then I consider my strategy to be successful.
I purposely have not set a goal for my portfolio's total return (e.g., "beat the market") because I have no control over how the market will behave. My portfolio is lagging the market thus far this year, but that does not bother me because I know I am making satisfactory progress toward achieving my personal goals, which are independent of the market.
Best wishes as we both work toward achieving our goals!