With stock prices going up and down during market hours, investors may be at a loss as to when to buy and potentially sell their holdings. In fact, stock price movements can be very irrational. Investors should take advantage of the market’s irrational behaviour.
Take Baidu Inc. (ADR) (NASDAQ:BIDU), often seen as China’s copycat of Alphabet Inc., as an example. Baidu fell to as low as US$100 per share last year when China’s growth was expected to slow down further.
Stock price bottoms are impossible to catch. However, it doesn’t mean investors can’t take advantage of the market’s fear. Even if you bought the Baidu shares at US$145 per share in the last two dips, you’d still be sitting on unrealized capital gains of 34% now that the shares trade at a more reasonable valuation with relation to the company’s growth potential at US$195 per share.
Unfortunately, the opportunities to buy Baidu at a margin of safety are gone for now. Interested investors should consider Baidu if it dips to US$150-160 per share.
Bank of Nova Scotia example
In January this year, Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) dipped to almost $51 per share and yielded 5.5%. Again, it would have been difficult to buy at the bottom. It was feared that low oil prices would trigger a weaker Canadian economy, potentially bringing it into a recession and thereby impacting the bank’s profitability.
Yet buying low is a very effective way to reduce risk because you pay less for more, assuming the factors putting pressure on stock prices are temporary. If you’d bought Bank of Nova Scotia shares at $55 per share, it’d yield 5.2% after its dividend hike in the first quarter, and you’d be sitting on unrealized gains of 15%.
After you buy quality dividend-growth stocks such as Bank of Nova Scotia, you can essentially hold on to its shares forever and collect a perpetual stream of dividends. In fact, at under $64 per share, the bank is still discounted by about 10% from its normal multiple, and it offers a competitive yield of 4.5%.
Investors should buy quality companies when others are selling because buying on dips reduces your risk as well as increases your total returns. At other times, quality companies can be overvalued. Take the Canadian telecoms for example. That’s when investors should decide whether to hold on to the companies or to take their chips off the table by selling a portion or the entire position.