Market Turmoil? Why Buying Into it Could Make Sense

By Kyle Metivier - March 7, 2012 | Tickers: DDD, BMY, JNJ | 0 Comments

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I've said it before that I enjoy the days when Dr. Market utters the uncomfortable words, “You may feel some pressure." Whether it’s a “market correction”, “resting”, “overreaction” or “panic”, these are the days where I scoop up those unwanted children and give them a warm home in my portfolio.

Not everyone trades the same, that would be boring and all too predictable, and I have the utmost respect for those that make a living in this business. There have been days where I have thought to myself that I might actually be able to do this, and then there are days when I am thankful that it’s not the only means of putting food on the table. But when the market has the urge to vomit, it usually does and that is a perfectly normal and healthy reaction. So when the talking heads on your HDTV continually rant about China’s growth slowdown, Greek defaults, European recession, Brazil’s GDP decline, as though they were monkeys at the zoo, we should remain calm, cool and collected.

The school of thought during times of turbulence suggest that we own shares of “defensive” stocks that pay juicy dividends which, when reinvested, buy us more shares of the company’s stock at a discount. As the share price wanes, the dividend yield is higher, grabbing more shares to add to a long position at “cheap” prices. Everyone should know about dollar cost averaging, which is a practice I sometimes preach and actually often participate in, provided I have stretched out beforehand. Typical “defensive” stocks I commonly mention as boring, but over the long haul, they offer a warm blanket when the fires go out. Stocks such as Bristol-Myers Squibb (NYSE: BMY), which I own, and Johnson & Johnson (NYSE: JNJ), which I used to own, give shelter to us home traders when the market storms get a little nasty. Each stock offers a juicy yield over 3.5% and when it’s time to collect the dividend, we should welcome a little market unease, as we acquire even more shares.

Companies such as these don’t overreact like hormonal teenagers amped up on Red Bull, so don’t expect 50% returns in the course of a year, but they aren’t going to be oversold either, when “bad” news comes along like China’s half-percent decrease of GDP growth expectations. But for those stocks we purchased that don’t offer dividend yields, like 3D Systems (NYSE: DDD), “markets in turmoil” offer an opportunity to more aggressively practice a little dollar cost averaging, by adding to long positions at cheaper prices. I consistently practice this trading behavior, not only because I trade every week, but because it makes sense to me, no matter how irrational I may seem. There is a fine line with this type of trading, because you have to not only feel it in your bones, you have to know the company you invested in is strong and the sell-off is the work of gremlins or people in panic mode, scurrying back to the nest of cash that keeps their intestines calm. 3D Systems has had a glorious three-month run, and it’s quite possible that some investors are taking their profits and moving elsewhere. But if you happen to own it, or a company like it, and based on your homework, not just the ramblings of some malcontent blogger that gave up talking about Apple for Lent, pullbacks are nice opportunities to practice a little dollar cost averaging for companies that don’t offer us the “defense” of dividends. As long as there isn’t a justifiable reason for the pullback (downward guidance from an earnings call, an SEC investigation, the CEO won’t stop eating glass, etc.), there’s no harm in adding to a long position with a company you believe in, provided you do so in line with your comfort level. I have made a few bucks here and there by simply adding $50 or $100 to long positions when share prices fall along with the entire market swoon, there’s no reason anybody else can’t, either.

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