It's Better to Buy Than Bail

09/13/2013 6:00 am EST

Focus: STOCKS

Sam Stovall

Chief Investment Strategist, CFRA Research

S&P Capital IQ's chief equity strategist  Sam Stovall offers good advice for times when market volatility makes your stomach queasy and tempts you to unload your stocks.

NANCY:  Thanks for joining us at the moneyshow.com video network.  My guest today is Sam Stovall.

SAM:  Hi Sam, thanks for joining me. 

NANCY:  So I want to talk about one of your little off quoted adages; it’s better to buy than to bail.  Do you think we are still in that sort of a market? 

SAM:  I think we are pretty much in a better to buy than bail situation whenever we have market declines, except for what I call mega meltdowns or bear markets of 40% or more. 

NANCY:  And you don’t anticipate that happening?

SAM:  I do not, no.  I do that because I like to use history as virtual valium, or in a sense, use stock market history to calm my nerves so that I don’t end up being my portfolio’s worst enemy.  So what I did was I went back to World War II and I put together all of the different declines that have occurred during bull markets and separated them into pullbacks, which are 5 to 10% declines, corrections which are 10 to 20% declines, and then garden variety bear markets 20 to 40% declines.  The reason why I did that is because a lot of people will tell me Sam, I just lightened up, I’m worried, and so I sold some of my equity.  They know when to get out, but they rarely know when to get back in, so my thought is how does that really help your portfolio if you end up having to buy back in at a higher price. 

NANCY:  Right and it costs you money every time you buy and sell. 

SAM:  Exactly, not only in terms of commissions, but in taxes as well, so my thought was okay let’s quantify, we have had 57 market declines of 5 to 10% since World War II, average price decline of 7%; it has only taken us two months to get back to breakeven.  We have had 19 nervous breakdowns; what group sang that song? 

NANCY:  I don’t remember. 

SAM:  Rolling Stones. 

NANCY:  Oh no, really? 

SAM:  Yep, we’ve had 19 of those, which are 10 to 20% declines.  It has taken us only four months to get back to breakeven, so if you start panicking, readjusting your portfolio to become more defensive, to add more risk tolerance or even more cash to your portfolio, by the time you finish all of that then all of a sudden the market is already on its way back up and then it’s like oh, well then maybe I have to undo all of that.  You can’t hit control Z on your portfolio the way you can on your computer, so I basically tell people you know what, pretend Sir Arthur Conan Doyle was an investor.  He wrote a book called the 7% solution.  Every 7% of the market declines add to your holdings.  That is the average decline in a pullback, the average decline in a correction and the average decline in a bear market. 

NANCY:  That makes a lot of sense.  What about sector wise?  What do you think the best sectors are going to be going forward? 

SAM:  Going forward, I still believe we are in a bull market scenario.  In terms of earnings growth, as well as momentum, I’m still leaning toward the cyclical side of the equation, consumer, discretionary and financials, and the more cyclical of the defensive sectors, meaning healthcare, I think could do relatively well.  Telecom Utilities are still going to be pressured by the fact that they are in many cases bond substitutes.  In 1994, when the S&P fell less than 8% in the five months after the fed started raising interest rates, utilities got hit the most down almost 20%.  So utilities, bond substitutes, high yields, they are the ones that are going to get hit the hardest. 

NANCY:  And the dividends aren’t going to make up for that are they?

SAM:  They won’t make up for it. 

NANCY:  Wonderful.  Thanks for joining me. 

SAM:  My pleasure.

NANCY:  And thanks for being with us at the moneyshow.com video network.  

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