The market appears to be weakening lately. Some of the high flying tech stocks are looking like they are experiencing some downward pressure. Facebook took a big hit Friday and tech was beaten down again today.
This is where it is great to be prepared. Like a good Boy Scout – be prepared! You want to get your “stock market” badge, don’t you!?
Having a margin of safety protects you in tough times. There are a number of ways to build a margin of safety. Don’t pay high prices for stocks is one. Netfix is selling at a PE of 224.5. Wow! I love the service, but there is no way I am buying the stock at those nose bleed prices. I would rather be safe than sorry. Let someone else be the hero.
Owning a stock at a fraction of the current price is another way to build a margin of safety. That is why I look at the metrics of my stocks based upon what I PAID for them. If the current dividend yield is three percent and you own it at half the market value, you are getting a six percent dividend yield! With good quality companies, it only gets better over time.
Owning stocks that have great fundamentals is another aspect of the margin of safety. How did they do in the last market downturn? It gives you a flavor of their resiliency to averse economic and market factors.
Buying when the PE is low is another facet of margin of safety. Heck, those stocks will not boom ahead like the growth stocks, but you will most likely survive a severe market downturn.
Having a dividend is another way to protect your backside. While a dividend is no guarantee of a continuing dividend in the future, it is another aspect of safety. I would rather have the “jingle in my pocket” than ride the wave hoping to get way more back. The turtle often beats the hare.
Stay safe, be smart and continue your journey to financial independence.
Now get your compass out Boy (and Girl) Scouts. Your compass can save you from disaster. Also, don't forget your Swiss Army Knife!
