Why I'm Buying Stocks Today

Last Updated Aug 5, 2011 9:33 AM EDT

It's been a bloody two weeks on Wall Street. Stocks have declined 12 percent in only nine trading days. The headlines are dramatically scary and anxiety-provoking. Even comments on my posts are getting progressively doom and gloomier, with ominous predictions that this is the plunge that will make 2008 seem like a minor correction. Call me crazy, but this all adds up to a clear buy signal for me. And before that statement confirms in your mind that I probably am crazy, let me explain.

A step back in time
In October 2008, the stock market took a dive that would have put Greg Louganis to shame. Stocks lost about 45 percent of their value from the October high the year before. Though it may not have been the best time to sell stocks, it was an excellent time to buy them, which I did. I bought more stocks to rebalance and, by March 9 2009, I looked like an idiot as the market fell further and was down a full 55 percent. I then bought some more. This video was the perfect snapshot of that stressful moment in time, and was filmed two trading days before the market bottomed out.

Ultimately, the strategy proved to be a good one when the stock market rallied to within three percent of the 2007 high, before the past couple of weeks. As the market recovered, I sold some stocks to rebalance. In fact, as recently as the last two months, I've been selling stocks to get back to my target allocation, being nervous about the five reasons stocks might be overvalued.

What really happened
In 2008 and 2009, I had no more of a clue than anybody else as to when the market was going to rebound. Nor was I immune to feeling the pain for both my clients' and my portfolios. Just comes with the territory of "hurts so good investing."

What really happened was that I bought stocks from those who panicked in 2008 and 2009, and have been selling them back to the same investors who panicked earlier. Now I'm merely buying it back at a 12 percent discount.

Three things I know
I don't know what the market will do today or even for the rest of the year. Though as I said back in 2008 and early 2009, I do know three things that are even more important for investors.

  1. Capitalism will survive. Talk of the next Great Depression is silly.
  2. Investors will do the wrong thing. Even those that claimed they learned a lesson in 2008 and 2009, may not be as brave as they thought they were two weeks ago.
  3. Volatility is good. Sure, it hurts, but it also allows for more rebalancing by buying and selling to those investors following their human instincts.
My advice - don't panic
Aside from the benefits to your own mental well-being, those who don't panic are likely to make a killing off of those who do. I'm buying today at the 12% off sale. And if we have another half off sale, I'll be buying as well. As my colleague Larry Swedroe notes, don't panic: market crises are normal.
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    Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.