What it means to ‘buy low’

Back in October, when the stock market was tanking and people were running for the exits, I bought stock in General Electric for my IRA. I never thought I’d own GE stock, which typically pays a decent dividend but isn’t usually a bargain and otherwise is a dull boy when it comes to stock ownership. But its long history, tremendous diversification across a whole range of industries, suddenly really big dividend and low price-to-earnings ratio made it look like a buy, despite the potential woes of its financial unit.

Since then, the stock has fallen 40 percent, including nearly 8 percent today. But my feelings about the stock haven’t changed a bit. In fact, I may buy more.

My point: This is what ‘buy low’ really means. Despite the horrific financial climate, GE made $3.7 billion, or 37 cents a share, in the last quarter. Now, that’s down 43% from the same quarter of the previous year, when everything was somewhat wonderful, but it’s a far sight better than a whole lot of companies.

It also held the line on its dividend — you know, the cash money the company actually pays you for holding its stock. GE now is paying a dividend yield of 9.5%, a crazy number for such a big company, and it has an equally crazy price-to-earnings ratio of 6.13.

Two things are driving down GE’s stock price: Its reduced performance as a company and good-old fashioned fear from industrial investors who are driven to Show Results Now. Traditionally, a large percentage of GE stock has been held by institutions, and institutional investors usually demand sexy results. They’ve been dumping the stock for its non-sexiness, to the point where there is little rational reason for this stock to be this cheap unless GE is in genuine danger of collapse.

It isn’t. It isn’t healthy, either, but GE is far from the only company to be suffering from the cowardice of institutional investors. And that’s where your ‘buy low’ opportunity lies.

What if you’re like me and you can hold on to this stock for a decade or more?  Would you like to own a stock that pays you 9.5 percent interest, and quite possibly a whole lot more when the economy recovers? Do you think GE is in danger of going out of business? Do you think the company will recover — and if it does, can you imagine what will happen to this stock if the value of the company bounces back and the P-to-E ratio of the much-more-valuable company moves to, say, 15?

This isn’t an endorsement of GE as a stock (there are many good reasons *not* to own it, as a matter of fact). This is just a statement of my feelings about what investors should be seeking right now.

Buying low often means buying stock in hard times. Selling high often means selling when things seem utterly wonderful. Investing your money at all means you are taking a risk that it may disappear. Understand this, and you may be able to make yourself into a successful investor.

Randy

Leave a Reply