Related topics: Banco Santander, Rayonier, Plum Creek Timber, Abbott, Jim Jubak
There's early, and then there's too early.
Early is buying Apple (AAPL, news) on Oct. 6, 2008, at $98.14 and having to wait until March 2009 -- six months before the stock again starts moving up. And up. And up. On March 6, 2009, Apple closed at $85.30. A year later, on March 5, 2010, a share sold for $218.95.
Early is happy.
Too early is buying homebuilder DR Horton (DHI, news) in July 2009. You thought long and hard before you moved. You didn't buy on the first bottom in summer 2008 or even in early July 2009. You wanted to see signs that the sector had bottomed and started to recover. The rally at the end of July seemed to promise that, and so you bought at $11.17 on July 29, 2009. Now it's February 2011 and the shares trade at $12.77. The 14% gain doesn't seem paltry until you remember that it's your gain over 18 months and that DH Horton shares still haven't taken off as you'd hoped.
Too early is disappointed.
Jim Jubak
And it can be even worse if you decide you can't wait any longer and just have to sell. If you've reached this point, there's a good chance you've spent months sitting on dead money before taking the loss.
It's clear why we buy early. We want to get a bargain price before everyone else piles on. And it's clear why we buy too early. We don't want to pass up a bargain and lose our chance, so we jump in too soon.
Are there any rules that might separate early from too early and let us maximize our investing happiness and minimize our investing disappointments? I think so, although the rules are more ad hoc than universal. And I think they tell us something about early and too-early opportunities.
Spain as a test case
I'd argue that Spain has been too early until very recently, for reasons that are typical of why we buy too early. I'll use the shares of the big Spanish and Latin American bank Banco Santander (STD, news) as a simple stand-in for the Spanish market.
The stock traded at $21.84 in May 2008 and had plunged to $5.19 by March 2009. Who wouldn't at least consider snapping up some shares?
But you would have been too early if you were expecting a return to the $21.84 price of 2008. If you'd bought in March 2009, you would have enjoyed a great ride to $17.70, ending on Dec. 4, 2009, and then given half of that gain back. The stock traded at $12.61 on Feb. 18, 2011.
And I'll just bet that if you'd ridden from $17.70 even partway back down, you'd in all probability be out of the stock now and not thinking about getting back in. That would be too bad, as I think if you were to buy Banco Santander today, you would be early instead of too early and could look forward to a 25% gain in a year -- and steady growth after that.
This example highlights a few reasons we buy too early:
- First, the bigger the fall, the more likely we are to get overeager and buy too early -- a drop $21 to $5 is pretty tempting.
- Second, the better a stock did before it tumbled, the more likely we are to get in too early. Banco Santander was up 19.5% in 2007 and 44.6% in 2006.
- Third, the more we wish we'd owned it before the fall, the more likely we are to get in too early. The stock's price-to-book ratio, a measure of a value stock, had climbed to 1.9 in 2005 from 1.6 in 2004. It was clearly too late to get in by 2005, many investors would have legitimately concluded.
There's nothing terribly surprising about any of this. It's only human nature to think that something -- in this case, a stock -- will revert to its former price or trend. And it's only human to hope that we might now be able to make up for the profits we missed out on earlier.
Stocks don't move in a straight line
Banco Santander's stock illustrates another reason behind some of our too-early decisions. We tend to think in straight-line trends. Once Banco Santander had started to climb off the bottom in March 2009 and was just slightly above $5, many investors saw it as a sign that the trend was uninterruptedly uphill from there. They didn't think about setbacks, relapses or false dawns. That's exactly what we got in Spain. The belief that the end of the global financial crisis meant the end of the Spanish banking crisis turned out to be very wrong, and the country proceeded to plunge into its own debt crisis.
This kind of interruption in a trend that seemed so promising, so certain to continue upward, happens to investors so often that we've developed names for it. One of my favorites is "head fake," as if the market intended to take a stutter step to the right before shifting the ball to the off-hand and driving to the hoop. The real "head fake," though, is inside our own heads, where we've convinced ourselves that a trend is in place before it really is.
