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Today Was a Day for the Stock Market Record Books

May 6, 2010 By 3 Comments
Stock Market Crash

Image © iStockphoto/Thinkstock

I took the day off, spending most of it playing video games.  About 4:30 p.m., my dad gets in touch with me by calling Aaron, who tracks me down and hands me the phone.  It seems that the stock market had been in total chaos, setting an intra-day volatility record, and he had been frantically trying to get me on the phone as I blissfully drank coffee, read, and thought about our sporting goods businesses, completely oblivious to what was going on (we’re value investors – I didn’t get here just so I can stare at ticker tape all day.)

A lot the ground was regained by the end of the day, but apparently, at the height of the turmoil, we were losing massive sums of money each minute as panic ensued.  This all happened over a fleeting, 30-minute window.  He (quite wisely) used the opportunity to expand some of the positions we already had in place at far more attractive prices, some of which were up 50% by the end of the day.

I’m happy with everything we own so, frankly, it’s a meaningless blip on the radar other than the fact it gives us an opportunity to buy more of what we love.

Berkshire Hathaway fell quite a bit but, unfortunately, British Petroleum didn’t even budge!  I mean, I just bought some yesterday, as I explained, and would have loved a massive, scream-inducing drop.  If BP had gone to $30, I would have probably dipped into some of the reserves and bought shares outright by the truckload full.  A few years from now, I’d expect the dividend income to provide a source of significant earnings for our retail group.  Hell, I could probably use it to build a new location!

And those are the few positions I talk to you all about (I don’t reveal what we invest in because stock ideas are subject to competition).  I mean, the only reason any of you even know about BP is because I wanted to explain the strategy of buying a deep-in-the-money call to mitigate the cost of the time premium, while still gaining the benefit of leverage.  It is an aberration from the type of trades we normally make around here, so I thought it was a teaching moment.  Some of the stuff I’m watching … it could be so attractive if things fall further.

A boy can dream, can’t he?  Come on, people.  Panic a little bit more.  Please!?

(My job over the coming 36 months needs to be getting our operating businesses larger and more profitable so I have a bigger stream of cash coming into the office.  The operating businesses are a key part of our strategy – they are the well from which the water flows that lets me take advantage of these types of opportunities.)

Related posts:

  1. Interesting Day Both for Our Businesses and the Stock Market
  2. Worst Single Day Percentage Drops in the Stock Market as Measured by the Dow Jones Industrial Average
  3. Stock Market Finishes with Worst August Since 2001
  4. Today’s Market Is an Example of the Reason I am a Value Investor
  5. Stock Market Crashes, Losing 10% in Two Trading Days
  6. The Hindenburg Omen and the Stock Market
  7. My Day In Pictures – A Shattered iPad, a New Bottle of Creed, Books, and a Store of Flavored Olive Oils – September 12, 2011
  8. Media Sensationalism Continues to Exacerbate Stock Market Fluctuations
  9. The 12 Implications of Realizing There Is No Stock Market
  10. Stock Market Drops Make Me Excited

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  • Austin H

    I was eating lunch at a Thai restaurant with my dad and was amazed at how quickly it was going down. They had Fox news on the TV with the analyst blabbing about Greece. In the scheme of things, how does Greece’s debt affect the value of most US companies? Oh ya- it’s called wild speculation.

    Unfortunately, some stop limits hit and I’m sitting on a pile of cash. I’m debating buying more WLP, BKE or COST. I’m also thinking I may just leave it to the professionals and let my mutual fund take care of it.

    I’m all about long term investing, but it’s painful knowing I could have bought a new car had I sold yesterday and bought in this evening and be in the same position except with a new car. Conversely, the market could have just as easily climbed up 10% irrationally and I’d have forgone some nice appreciation and I’d be stuck paying insurance on the car!

    -Austin

    I liked your website so much I started my own. I hope it helps with my writing and allows me to look back on successes failures. Stop by when you get a break from conquering the world.

    AustinLHill.com

  • Frat Man

    Hey Joshua- great blog, I’ve been reading your “Beginners Invest” postings on about.com for a while, and I just wanted to let you know I’m a big fan.

    But I have a question for you. I come from a family that never particularly valued investing (“they don’t trust stocks”), but after reading your Dairy Queen/Hershey 7.5 million article, I was able to convince them to form a family retirement account that invests in Proctor & Gamble each month. And I’m going to keep the stock in certificate form to help them realize the ownership aspect of the business. Long story short, here’s my question. If I’m holding the stock certificates, can I still reinvest the dividends? How does that work when you have stock certificates? Does the piece of paper somehow recognize that say, 10 years of dividends have been reinvested when I redeem it? Just curious, and I haven’t ever seen anyone address this topic, so I was hoping you could help me out. Keep up the good work!

    • http://www.joshuakennon.com Joshua Kennon

      Frat Man,

      Thanks for the kind words. When you participate in a direct stock purchase plan, here is how they typically work:

      Imagine you have a single, framed stock certificate on your wall. You mentioned P&G so we’ll go with that for this example.

      You will fill out a form with the transfer agent that handles the direct stock purchase plan. This form will tell them several things:

      1. The percentage of your dividends you want reinvested in additional shares of stock and the percentage you want paid out either as a mailed dividend check or directly deposited into a bank account.

      2. The regular amount you want electronically withdrawn from a bank account to buy additional shares of stock each month.

      Whenever you buy shares electronically through regular withdrawals or dividend reinvestment, they will be credited to your direct stock purchase plan account. These are known as “book entry” shares instead of stock certificates. Your account would show “Number of shares held by you” and “Number of shares held by transfer agent” or something along those lines.

      So if you bought 100 shares through the regular program, your statement would show you own 101 shares with 100 held in book entry form and 1 held by you in certificate form. You would receive the dividends for the full 101 shares, though.

      The transfer agent won’t issue additional stock certificates unless you fill out a separate form and request them. In most cases, it’s not worth the hassle because if you lose them, you have to pay for an insurance bond to cover any potential fraud. (That is why we have 1 share of each of our direct positions framed in the office; the rest are held in book format with the transfer agents.) If you wanted the stock certificates, you could just fill out the form every Christmas and get a certificate for the shares that had built up in your account since your last request.

      I know someone who has regularly invested $284 per month into the direct stock purchase plan of U.S. Bancorp for years. He reads the stock report when it is published to make sure the company is still profitable. Otherwise, he completely ignores the market. During the recent crash, his regular contributions were buying shares as low as $8 to $9 each so he got far more shares for his money than when the stock was at $35 a few years ago. Now, it’s almost recovered to its previous levels and his average price is far lower than a lot of other investors who bought sporadically.

      As a result, he didn’t lose a bit of sleep when the Great Recession started, even when the company cut its dividend temporarily because the firm itself was still making money. He does the same thing with several other companies so that if one stock were to blow up like Enron, it wouldn’t hurt his long-term plans. The last I knew, he figured when he retired he’d have at least $600,000 in each of his direct stock purchase plans if he only earns 7% or 8% on his money.

      I think most investors would be better off if they got rid of their trading accounts and over their working lifetime, bought regular amounts of companies they understood, reinvested their dividends, and gave the market 40+ years to work. I mean, someone who is 25 years old who puts aside $300 per month and earns 10% on his investments would have $2,588,057 by the time he was 70. That isn’t a big sacrifice considering the average American household income is $50,000.