Why You Should Embrace Falling Markets

Bob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It’s a scary investing world out there. These are volatile times, as the markets continually fret over if the Federal Reserve is close to tapering off its long-held policy of tens of billions in monthly bond purchases.

We have now seen 8 straight triple-digit moves in the Dow Jones Industrial Average, including two 200-point down days in a row. Interest rates are on the rise, shaking the temperament of market participants who apparently felt the Fed’s quantitative easing policies would last forever.

For those of us Foolish enough to see past the headlines and focus on prosperous, long-term investing, these big down days don’t scare us. In fact, we’re excited by the prospect of owning pieces of our favorite businesses at lower prices than we could a few days ago, and if you’re like us, you should be equally excited!

Learn to love losses

It’s an unfortunate reality of most retail investors, but it’s true: investors tend to buy high and sell low. We often see a stock rising and, greedily, jump in so because we don’t want to miss out on the joy ride. At the same time, when stocks fall, many investors panic and sell at the exact wrong time.

If ‘buy high, sell low’ doesn’t sound like a profitable investing strategy to you, you’re on the right track. As Warren Buffett famously said, investors should be "greedy when others are fearful and fearful when others are greedy."

I’ve written previously about high-quality blue-chip stocks I would love to own, but don’t because I couldn’t bring myself to pay prices that I considered to be too high. These include premier businesses such as Pepsi (NYSE: PEP), Kimberly Clark (NYSE: KMB), and Johnson & Johnson (NYSE: JNJ).

Not too long ago, each of these stocks was teetering near all-time highs and trading for rich valuations. Each of these stocks was exchanging hands for 20 to 24 times trailing earnings. Moreover, since their stock prices had rallied so far in excess of their dividend growth, their dividend yields collapsed down to below 3%.

More recently, each of these stocks has come off their all-time highs, and I’m starting to get excited. These are premium businesses that deserve premium valuations, but if I can get them for multiples closer to the market’s approximately 17 P/E, I consider it an opportunity.

Get your shopping list ready

Each of these stocks has treated shareholders tremendously well over their long histories, and because of their rock-solid businesses, will continue to do so for many decades to come.

Consider that this year, Pepsi raised its dividend for the 41st year in a row. Kimberly Clark has also raised its dividend for 41 years in a row, and has paid dividends for 79 consecutive years. J&J, meanwhile, is the gold standard for dividend payers--J&J has increased its dividend for an amazing 50 years in a row.

If you’re wondering how any company can hold such tremendous histories of success in such a volatile market, it’s because of the stability of their underlying businesses. In times of economic distress, consumers will cut back on buying appliances and taking luxury vacations. However, consumers are extremely unlikely to stop purchasing soda, toilet paper, bandages, and mouthwash, regardless of the prevailing economic environment.

Don’t fear the Fed

In the end, investors need to understand that ultimately, the Fed’s tapering is a good thing. If the Fed decides to end its bond-buying and aggressive monetary easing, it would only do so amid a stronger economy. The stock market doesn’t like the Fed taking the punch bowl away, but an economy that can stand on its own legs is absolutely normal.

Just as when a child has the training wheels taken off their bike there’s bound to be a few scrapes and bruises, you can expect enhanced market volatility if the Federal Reserve isn’t there to keep juicing markets. But that also means we’re finally back to a healthy economy, which is a great thing for corporate profits to keep flowing higher. In turn, stocks such as Pepsi, Kimberly Clark, and J&J will only continue their long histories of raising dividends. On top of that, if you have the opportunity to buy these fantastic stocks at attractive prices, you’ll do even better over the long term. Get your shopping list ready, and be ready to take advantage of bargain prices.

PepsiCo has quenched consumers’ thirst for more than a century. But recently, the company has left shareholders craving more. With increased competition and loss of market share, many investors wonder if this global snack food and beverage giant is simply fizzling out. Are more bland results ahead for PepsiCo? The Motley Fool's premium report on the company guides you through everything you need to know about PepsiCo, including the key opportunities and threats facing the company's future. Simply click here now to claim your copy today.


Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson, Kimberly-Clark, and PepsiCo. The Motley Fool owns shares of Johnson & Johnson and PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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