Chapter 22

The Macy’s Approach

All too often, and unfortunately so, some market participants search for stock market bargains as if they were shopping in a department store. They scour the “new lows” list in their newspaper in the hope of finding a “sale-priced” stock—a share price trading significantly below its 52-week high, or close to its annual or possibly even multiyear low. Or maybe they use some other metric. When viewed in this context, the shares in question may indeed seem like a bargain, but it’s a dangerous premise. Investing one’s hard-earned capital based on how poorly a stock is acting and where it trades in relation to a specific range is hardly an investment strategy. You’re actually going out of your way to purposely search for underperformers.

This type of thinking is financially dangerous and must be banished from your investment repertoire. How do you think your life would fare if you followed that “bargain basement” approach? Looking to buy a stock simply because it’s on the new lows list is like going out of your way to purchase a house in poor structural condition or a car with mechanical difficulties because you think their respective price markdowns somehow insulate you from further risk. They don’t.

Let’s get something straight: You don’t shop for stocks as you would goods in a department store. They’re completely different things. When you buy a marked-down item in a retail store, you own it, the purchase is final, and it ceases to fluctuate in price. Not so with that poorly acting stock on the new lows list or in a downtrend, which can continue to decline in value (and probably will if a bear market is in progress) long after you buy it. Beware! Those seemingly low-priced “steals” can rob you of your investment capital.

Buying a stock only because you think it’s at a low point is like assuming that a deteriorating relationship that you believe has troughed can’t get any worse. Unfortunately, each can and often does—especially if the main trend in both instances is down. In cases like these, there’s usually no plan to deal with the worsening condition because of the mistaken belief that things have bottomed out and are about to take a turn for the better. When that scenario fails to materialize, it can take an emotional toll.

Searching for equities like they were department store items is a dangerous financial undertaking and certainly not a part of my investment approach. Unlike a discounted department store item, stocks trading near their lows often aren’t the bargains you think they are. If you’re truly convinced that a stock is near its low and have made a decision to purchase it, at least consider a small initial investment. If the shares continue to slide, you’ll be glad you withheld the bulk of the remaining capital, and if they start to act better (from a technical analysis standpoint on the charts), you can always add to the position while employing a risk management discipline.

“Buy low, sell high” are four words I never utter, as some of the most serious market money in primary bull markets is made buying at (what seems like at the time) a high price and selling much higher. The opposite is true in a primary bear market, where what looks cheap can become much, much cheaper. Chances are that you’ll run out of capital to invest in those so-called bargains long before their share quotes bottom.

Moral: You cannot treat your stock market purchases in the same fashion in which you shop for department store goods. They’re totally different. Lower isn’t necessarily better. In fact, the best bull market bargains are often those stocks that are acting well on a technical analysis basis and even rising in price or appearing on the “new highs” list. This analogy fits with our relationship theme of spending more time with individuals who enhance, contribute to, and brighten your life as opposed to those who continually drain your energy.