***DISCLAIMER: I AM NOT AN INVESTMENT PROFESSIONAL.
ANY AND ALL TOPICS IN THIS POST ARE MERELY MY OPINION.***
I wanted to take some time to respond to Scott, who left a comment on this month's net worth post asking why I was still buying stocks rather than paying down debt.
First I want to be upfront that I know that I go against most - if not all - get out of debt plans on this, but I believe that now is the time for someone like me to be purchasing stocks. Don't get me wrong, I'm still aggressively paying down debt. The stock purchases that I make are minor. But the fact that I'm investing at all flies in the face of most debt advice.
I believe, if your patient and smart about it, stocks are the most important savings tool you have. If something happened in 5 years and I needed to stop saving through stocks, I'll be glad that I purchased what I could now, knowing that I had a solid base to watch grow over time.
There are two reasons that I had the confidence to re-start my stock purchase plan during the early phase of the current crisis. The first reason is fear and the herd mentality.
But please don't take my word for it. Mr. Buffet is more credible than I:
"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful." - Warren Buffet, nytimes.comI myself believe in this, however am still a passive investor. I don't day trade or buy hunches. I research for a while, pick a stock I'd like to purchase over time and then use dollar cost averaging. Basically, I spend the same on stocks each month through an automatic plan. This, in theory, spreads out the cost of the total stock over time and protects against market changes. So when stocks are low, my purchase power is increased.
The second reason that I restarted my stock re-purchasing plan is one of the results of the fear discussed earlier. With the market shifting so drastically, many solid stocks are now undervalued. I'm not talking about the random, never-heard-of-'em stocks that investing sites try to sell you as tips. I'm talking about big name companies that you have heard of. There are many ways to look at how valuable a stock is. And there's much debate over which of those ways actually tell you what you want to know. But, really, I was taught (in an accounting class actually) that there are three things you really need to look at - found within the cash flow statement.
- How much money comes in?
- How much money goes out?
- What do they do with what's left over?
"I should emphasize that we do not measure the progress of our investments by what their market prices do during any given year. Rather, we evaluate their performance by the two methods we apply to the businesses we own. The first test is improvement in earnings, with our making due allowance for industry conditions. The second test, more subjective, is whether their “moats” – a metaphor for the superiorities they possess that make life difficult for their competitors – have widened during the year." - Again, Mr. Buffet in the '07 Berkshire Hathaway Shareholder LetterIf you couldn't tell by now, I have a lot of respect for Warren Buffet. The bottom line is that I'm 28 years old. I am paying down debt without incurring new debt (student loans aside) and I have over 30 years to watch these stocks grow. Right now I'm just learning what I can and planting some seeds - I just try to by my seeds on sale, that's all.
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