The Market’s at a High, That Makes it a Buy!

The US market is at a record high.

Earlier this week, the four major US stock indices all reached new all-time highs.

The Dow Jones Industrial Average. The S&P 500. The NASDAQ Composite. The Russell 2000.

All are at a high.

For many investors, that spells fear. But not all investors. A certain subset of them don’t see a new high as an opportunity to sell.

They see it as an opportunity to buy. Here’s why…

Think about it. What do stock indices tend to do?

That’s right, they go up. Even the most bearish of market commentators and analysts would concede that over the past 120 years, the general direction of stock markets has been up.

If that’s true (and it is), why do so many investors try to ‘buy low and sell high’?

Simple logic would suggest that in order to make money from stocks, you have to buy stocks when they’re high, and then sell them when they’re even higher.

We know it’s an odd thing to say. But we’ll show you, with pictures, to explain what we mean…

Keep buying on the high?

Check out this series of charts. They’re for the same stock, Domino’s Pizza Enterprises Ltd [ASX:DMP]. The first shows you the chart from 2005 to 2010:


Source: Bloomberg
Click to enlarge

From 2005 through to 2010, the stock gained 96.75%. That’s an average annual gain of 14.51%.

The first question here is whether an investor should have sold after such a gain. The second question is whether an investor should have bought the stock after a near 100% gain.

Many investors wouldn’t think about buying at that point. That would have been a bad decision. Check out the next chart, from November 2010 to November 2013:


Source: Bloomberg
Click to enlarge

Investors who bought back in 2005 would have continued to do well. They would be up 443.46%. But what about those who bought at the ‘high’ we looked at above? Well, they would have done well too.

The stock gained 169.09% over those three years, an average annual gain of 39.26%.

Pretty good. But what should an investor do now? Sell and take profits? What about those who didn’t own Domino’s? Should they now buy it?

Check out this chart, from November 2013 through to today:


Source: Bloomberg
Click to enlarge

Investors who bought back in 2005 would now be up 2,257%. But what about the ‘crazy’ investors who bought on the high in 2013?

Well, they haven’t done too badly either. They would be up 333.7%, for an average annual gain of 63.08%.

You see what we’re getting at?

Investors who tried looking to buy at the low may never have bought, simply because the trend for this stock was almost constantly in one direction — up.

Look, we know it’s hard to buy when a stock is trading at a high. But when you see examples such as this, we’re sure you can agree that trading and investing this way seems to make a lot of sense.

In which case, you’d want to know more about it, right? We’re sure you would.

That’s where the folks at Cycles, Trends & Forecasts enter the fray. Cycles, Trends & Forecasts is unique among our investment advisories, in that its main focus is on helping investors build knowledge, and helping them find the kind of investments (including stocks) that could gain year after year — just like Domino’s.

In our book, it’s a must-have advisory. If you don’t yet get it, try it now. Go here.

Cheers,
Kris


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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