Use Bad Timing as an Opportunity

Handling emotions when confronted by unfortunate investment timing is key to success.  When you buy something there is a 50% chance it is going to go down.  When it goes down the decline can be substantial.  Everyone knows investments fluctuate.  But there is a big difference between watching the news on CNBC and watching value of something you have actual money in start to head the wrong way.

When that happens the correct move is usually to hang on and, if possible, buy more.  If you have put money into something the assumption is that research dictates it is a good move.  So a bad entry point on a quality investment generally presents opportunity.  Putting more money into an investment when the price declines is known as an average down.

In 2014 I bought Exxon Mobil (NYSE: XOM).  It had been on the watch list for years.  It seemed like they had a good culture of management dating all the way back to the time of John D. Rockefeller.  Their tradition of raising the cash dividend was a plus.  The fact that they had a specialty chemical arm meant that they could pivot away from the primary oil and gas business if it ever became less viable. The company had experience with hydraulic fracturing, which seemed like it could be essential going forward.  It did not seem that alternative energy would be mature enough to replace fossil fuels any time in the near future.  I had not bought because it looked like energy was in a huge bubble. Fuel prices had gone up significantly due to excessive domestic consumption and massive demand from China.  At the same time it seemed increased U.S. production capacity was here to stay and that it would have to impact prices.  But month after month, year after year prices stayed high.  So the purchase was made.

It would have been better to keep waiting.  The share price seemed a little high: around $104.  So discipline was employed and sure enough a correction occurred.  Prices dipped down to around $98 and the trigger was pulled.  Within a few months oil prices began a historic plunge from above $100 a barrel to as low as the mid 20′s.  Exxon shares went along for the ride.

At this point it would have been easy to panic and sell everything for a significant loss.  But analysis that caused the initial buy still looked sound.  Markets are based on emotion more than fact.  The assumption was that people would get over the shock of this bubble bursting.  Exxon would still be making money, as they have for decades, and shares would rise again.  So when it was around $76 the position was increased by fifty percent.

This reasoning proved correct.  Shares have recovered.  The new money put in at $76 took break even from $98 down to $91.  That is about where Exxon trades as of this writing.  Dividends paid put profit on this investment so far at about 7%.  That is not hitting it out of the ballpark.  But it is much better than the 20%+ loss that would have been incurred by selling out at the bottom.  And without new shares purchased at $76 the investment would still be waiting for a return to profitability.

Try to avoid panic selling when you call the cycle wrong.  If you have chosen an investment of quality putting more money to work at the bottom of a downtrend will most likely increase ultimate profit on your position.

 

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Articles presented here are general opinions for your own consideration.  They are not specific advice for any one investor.

Average Down, ExxonMobil, Panic Selling, Research

Market Timing