I love these signs. People in my local Kroger stare at me when I take these pictures, but I am going to keep doing it. Halloween candy, Easter candy, back to school supplies, summer/pool toys, pumpkin pies, the list could go on. I am always amazed at the discounts available on various items at slightly irregular times. And these are just the items that I notice when picking up groceries. I am not a bargain shopper or coupon clipper when it comes to groceries, but when it comes to businesses, I think these signs serve as a useful reminder of how to shop for businesses.
We have all seen the reduced price labels at the grocery store. $1 off Pepsi products or your favorite cereal selling for $0.50 cheaper than it was last week. We have become conditioned to expect some sort of “discount” on our everyday purchases. In the back of our minds, we know they have already marked the price up and just discount it weekly to make you feel like you are getting a deal (that’s what Ron Johnson wanted to stop at JC Penney).
Either way, we buy it because the kids want milk, eggs, yogurt and Cheerios, etc.
These everyday discounts stand in contrast to the super bargains on off-cycle purchases, like Halloween candy in November or school supplies in the middle of September. These bargains are off a different kind, not just a different degree. These are real bargains, paying $1 for 5 notebooks is Kroger clearing its inventory. I use these notebooks all year around and I paid $1.99 each in January for these notebooks. Needless to say, I don’t need to get out my calculator to concluded this is a great bargain.
I think of businesses in a similar way to everyday discounts and bargains at the grocery store. The stock market prices for businesses fluctuate on a daily basis. One or two percent up or down each day. These percentages go red, they go green, but they are just like the everyday discounts at your local grocery store (I have yet to see Kroger advertise an increase in prices; maybe Whole Foods does this?). The great thing about investing in business that differs from buying groceries is that I don’t need to feed my kids with businesses on a weekly basis, so I can effectively tune out the everyday discounts flashing at me. I don’t run a mutual fund, so I don’t have to be 100% invested at all times (or any time for that matter), needing to invest any new inflows of capital into the current $1 off Pepsi or Coke discount.
Instead, I can wait for the real bargains. Understandably, this waiting is slightly more difficult because the market does not telegraph the exact timing of the bargain specials in advance (Attention shoppers: After Halloween, all shares in Cinemark will be 40% off).
There is, however, a misunderstanding of what the hard part of this process is. Being able to clearly recognize a bargain from an everyday discounts should be the easy part. The hard part for most investors (and I believe this has a lot to do with structural challenges, such as being 100% invested at all times), is being too impatient. Seeing an everyday discount of 2%-3%, you may think you are getting a bargain mainly because you want/need to buy something, anything. A lot of investors speak of being patient and having a 3-5 year investment horizon, which I think is a proper approach once you purchase a stock. However, I rarely hear investors speak of being able to invest in cash for a long time horizon. This reminds me of the comment from Chuck Prince, former CEO of Citi, “As long as the music is playing, you’ve got to get up and dance.” Music or no music, you can’t let other people’s choice to dance influence your decisions.
On a related note, investors may find that even after finding a real bargain that is 50% off, there may be another decline in the price, say 75% off. As in the grocery store situation, if there are any leftovers after the first big round bargain discounts, the prices will go from 50% off to 75% off. Not a reason to panic and return your purchases out of fear that they are defective or inedible, but another great opportunity for you to buy some more at an even better price.