to buy good companies in a declining market? Average in? Wait until the broad market appears to have bottomed? Choose some Price/Fair value for each stock as estimated by Morningstar and buy there?
Apple is one example. AAPL looks expensive to me, but Buffett bought above today’s price in Q1. Alphabet is another example. GOOGL doesn’t look especially cheap, but mungofitch bought some recently (So did I, but not nearly as much as I would like).
I looked at my purchases in 2008-2009, and in most cases I would have been better off waiting until the broad market had risen 10% above the March 2009 bottom. (Fortunately I did load up in April 2009, which worked out well.)
So what’s the best strategy? Buy APPL, GOOGL and a couple of other good, highly profitable companies now, or wait? Unlike Berkshire, I have a short investment horizon, so I’d rather not buy and then see the stock go down another 20%. I don’t have 50 years to watch it grow.
Start with a list of all companies.
Eliminate all those you don’t have any skill at all for forecasting. (probably leaves just a handful, and for many people zero)
Of the remainder, pick the ones with the highest ratio of “pretty darned sure” earnings per share on average 5-10 years out, to current market price.
At the moment, it’s an interesting phenomenon.
Those who have been holding profitless growth rocketships think we’re in the middle of a massive
stock rout and are thinking about when to buy the dip because surely the bottom has to be near.
Those who are value investors are wondering what the heck they’re talking about. A lot are up nicely year to date, or experiencing only minor variation.
The recent revenge of the profitable stock is quite impressive.
What a difference a year makes: so-called “value” indices have now outperformed so-called “growth” indices over the last 15 years.
Reports of their death, it would seem, was exaggerated.
In case anybody enjoys my talking head moments, I think this post of mine from last year might be worth a reread.
It addresses one possible view of WHY super-growth stocks have done so well recently, and what that suggests might happen next. https://discussion.fool.com/old-video-of-peter-lynch-says-the-ma…
It ends: "A possible corollary: one should expect to see the phenomenon of fallen growth angels. A fall in the perceived growth rate prospects will cause earnings to matter when they never did before."
I looked at my purchases in 2008-2009, and in most cases I would have been better off waiting until the broad market had risen 10% above the March 2009 bottom. (Fortunately I did load up in April 2009, which worked out well.)
So what’s the best strategy? Buy APPL, GOOGL and a couple of other good, highly profitable companies now, or wait? Unlike Berkshire, I have a short investment horizon, so I’d rather not buy and then see the stock go down another 20%. I don’t have 50 years to watch it grow.
If you are not prepared for a 20% drop you shouldn’t be investing in anything other than cash. Really anything could happen at anytime. As for finding bottoms; roll a dice - you will probably end up just as well as if you tried to time things (doesn’t prevent me from trying).
A thing to remember - the price you pay will determine the return you get. Seems obvious. When you buy something you should have a pretty good idea of what your expected return is; if it meets your needs then pull the trigger and don’t worry if you didn’t get the possible maximum return - which is nearly impossible.
As an example - I am pretty confident that an investment at $2300 will be able to generate 15% CAGR over the next 3-5 years. Their business model is very stable and they are generating cash which is being returned through repurchases - pretty safe bet. That is a return I am happy with - so I purchased some more. Note: I still keep some cash because it could drop 25% or even more at any time and I wouldn’t want to be forced to sell (I need some cash for some upcoming spending).
I think this post of mine from last year might be worth a reread.
Where do you get your old posts from you think are valuable? I can’t imagine you just sequentially scroll through your masses of posts. Do you before submitting them copy the ones you think are worth remembering or looking up again (Predictions etc.) on your computer? Do you keep a local archive of those?
Thanks for the input. The advice so far seems to be to identify good companies with high and predictable growth and to buy based on the ratio of estimated earnings 5-10 years out to today’s price, if the ratio is attractive. Reasonable advice. This is pretty much what Buffett does, accept that he tries to look 15-20 years out. However Buffett said at the annual meeting that in 2008 he bought six months too early. Being six months and 25% too early doesn’t matter much if you’re going to hold for 30 years, but for those of us with shorter investment horizons buying too early in a down market can be painful. I’ll probably go ahead and buy, or average in, but like I said, my results in 2008 showed that waiting for the broad market to bottom and then start rising would have worked better.
PS. I assume that buying based on estimates of future sales or BV also works. I’m particularly attracted to companies with consistently high ROE, more so than to companies with high sales and earnings growth.
“A possible corollary: one should expect to see the phenomenon of fallen growth angels.
A fall in the perceived growth rate prospects will cause earnings to matter when they never did before.”
…to buy good companies in a declining market? Average in? Wait until the broad market appears to have bottomed? Choose some Price/Fair value for each stock as estimated by Morningstar and buy there?
One way to do it, even if you can’t accurately forecast future earnings ala Jim’s suggestion, might be to Value Average into the positions. Or, to keep from having FOMO in case we are at a bottom right now, commit 25% now, and Value Average the other 75% over the next while. For example, plan to do it monthly for 15 months, or until fully into the positions?
"A possible corollary: one should expect to see the phenomenon of fallen growth angels. A fall in the perceived growth rate prospects will cause earnings to matter when they never did before." … Oracle of Monaco
I like it!
Maybe TMF will let me change my handle.
Of course, there isn’t much insight in this one…just a lot of syllables to say “What goes up must come down”.
At least, “what goes up too much”.
The insight in that post, if any, is my theory that lower market-wide WACC will cause not just rising valuations, but also wildly expanding dispersion of valuation multiples.
Disclaimer: I am absolutely not the one to take timing advice from, having been extraordinarily patient in the overpriced markets leading up to 2008 and now, only to get back in way too early (though at least this time, I still have about 1/4 cash.
Nevertheless, one strategy is to buy progressively more as one’s favorite businesses sell at more attractive valuations, but to keep some reasonable amount on the sideline in the event of crazy-cheap valuations…and then buy long-dated call options. I did not trade in options at all in 2009, but it would have been nice to have had a bit of cash around to do so.