Recs
By Chuck Saletta | More Articles September 23, 2011 | Comments (7)
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When you buy stocks, you trade your cash for a chunk of a business. The lower the price of the shares you're buying, the more of them you can pick up for your money. Since the true value of those shares is based on the performance of the business behind them and not the random movements of the market, long-term investors should love market crashes.
After all, would you rather:
All else being equal, market crashes are what provide you the opportunity to get more business value for the money you're investing.
What about the stocks I already own?Of course, in an indiscriminate market crash, the shares you already own will fall along with the ones you're looking to buy. Unless you've got an urgent need to sell those, though, does it really matter? The crash has no impact on the real value of the business underlying those stocks. Indeed, the crash just might be providing you the opportunity to buy more shares of a company you already thought highly enough of to own.
That said, it's far easier said than done to watch your apparent net worth crumble in a market crash while stoically searching out ways to hand over even more cash to buy those falling stocks. In fact, it's darn near impossible to do, unless you've got both a stable financial foundation and the mind-set of a value investor in the best traditions of Benjamin Graham and Warren Buffett.
Mind over matterHaving a stable financial foundation matters, because the one thing that can ruin your best investing plans is being required to sell your shares while they're busy crashing for no good reason. With enough cash in the bank to handle life's little surprises, and enough insurance to cover the bigger ones, you can dramatically reduce the potential need to sell your shares to cover an unexpected event.
With that foundation firmly in place, you can then turn your attention toward what you're able to buy for the money you're putting to work -- the essence of value investing. Take a look at the companies in this table, for instance:
Company
Debt-to-Equity Ratio
Dividend Payout Ratio
5-Year Dividend CAGR
Consensus Long-Term Growth Rate
How Far It Has Fallen From Its 52-Week High
Hewlett-Packard (NYSE: HPQ )
0.66
8.1%
8.5%
7.4%
51.4%
Teva Pharmaceutical (Nasdaq: TEVA )
0.27
23.6%
24.9%
10.5%
35.8%
Johnson Controls (NYSE: JCI )
0.44
25.5%
10.9%
17.6%
34.9%
Aflac (NYSE: AFL )
0.28
29.6%
19.7%
11.1%
44.3%
Applied Materials (Nasdaq: AMAT )
0.23
19.8%
13.4%
13.5%
35.9%
Stanley Black & Decker (NYSE: SWK )
0.49
40.6%
5.3%
13.4%
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