If You Must Value The Market

He plays a mean ukulele

I don’t engage in market timing. I have been purchasing shares in high quality companies that have a history of paying and raising dividends almost every single month since early 2010. This means I’ve been sticking to a strategy of valuing individual stocks, rather than trying to value the overall market. I’ve purchased equities when the Dow Jones Industrial Average has been below 10,000 points and I’ve also purchased equities when the DJIA has been above 13,000 points, as it is now. I buy monthly because it’s a fairly holistic approach to investing, ensuring that I’m not trying to time purchases. I don’t let the market really guide me, rather I let individual securities and their pricing guide my purchasing habits.

When I see attractively valued (trading for less than intrinsic value) stocks that have excellent fundamentals that also meet my allocation needs and I have free capital available then I’m likely to buy. This is regardless of whether the DJIA is at 10,000 points or 15,000 points. That’s the honest truth. If I was a pure index investor I would probably have greater use for market-wide valuations. But I invest in individual stocks, and as such I try to take advantage of mispricing.

I’m building a Freedom Fund. This is my portfolio of solid dividend growth stocks that will provide me with the income I’ll need to sustain myself once I retire at a young age. It’s hard to build a portfolio if you’re not actively allocating fresh capital to it on a regular basis. I believe in purchasing on a value-oriented basis, using a host of valuation methods like the discounted cash flow model, the dividend discount model, historic price/earnings ratios compared to current the p/e, price/book ratios, price/cash flow ratios, relative pricing to competitive securities in the same industry and the like. What I don’t use, for the most part, is market levels to value individual stocks. The stock market is filled with thousands of individual stocks, and many of them will likely be cheaply priced relative to their intrinsic value, and many of them will be priced at a level that is higher than their intrinsic value. While the overall market valuation will tell you if investors are bullish or bearish market-wide, this really tells you very little about individual equities.

I look at the stock market like a giant department store. So, you can take any of your favorites – Macy’s, Sears, Dick’s for the sporting type. These stores are stocked wall-to-wall with merchandise. Now, you could average out the all the merchandise in the store and cost that out and come up with some sort of average. And, maybe you could say…”wow, that’s not bad!” or “hmm, that’s expensive.” You could make generalizations about all the merchandise in the store as an average, but you’d really be ignoring the fact that the stuff that’s located by the front door is probably priced at full-pop and you’d be missing out on the fact that the items located in the back by the clearance section are on sale.

I think of the stock market the same way. There are all kinds of companies out there with common stock that are sold to the public through exchanges – candy companies, shoe manufacturers, companies that sell cigarettes or companies that make construction equipment, aviation corporations and the list goes on. These companies are all priced at different metrics, and at different prices relative to their intrinsic value. Some companies will be currently adored by analysts and investors alike, and because of this their price will demand a premium. Maybe these companies currently in the spotlight just came up with a new product, or beat earnings by a $0.01 (which matters nil in the long run). Some other companies are shunned because they’re out of favor due to an earnings miss by an equally minuscule and non-relevant amount, or maybe they’re just so boring they’re completely under the radar, or the market is trying to anticipate some type of legislation from the FDA or DOD or some other agency about their future and as such is discounting the shares.

So, I don’t value the market. I value individual companies based on their intrinsic value and try to buy as far below that number as possible. Sometimes I’m correct in my valuation and sometimes I’m not. Valuing equities, in my experience, is part art and science. You’re using exact numbers for formulas and ratios, but trying to anticipate growth rates is a guessing game. The best thing to do is to seek a margin of safety below even conservative estimates.

But, getting back to the title of this article. There are some investors out there that must value the market. They feel compelled to buy “when the market is low”, and concentrate on overall market fluctuations rather than the underlying individual equities and their advantageous or disadvantageous pricing relative to value. If this is something that suits you, then I would suggest using two market-wide valuation tools.

The first is inspired by Warren Buffett. I’m currently reading the book “Tap Dancing To Work”, a phenomenal collection of articles, speeches and letters by and about Warren Buffett. This compilation was put together by his close friend, and author, Carol Loomis. It’s a great read. Warren Buffett doesn’t talk about market-wide valuations very often, as he also values common stocks and entire companies by their intrinsic value and tries to buy as far under this number as possible. But, he did engage in a lengthy speech back in 1999 about the state of the stock market and how he felt it was far overvalued. He also spilled the beans on his favorite way to value the stock market as a whole:

Total Market Capitalization As A Percentage Of GNP

What you see in the above picture is a graph showing the last five years of the entire stock market’s capitalization as a percentage of GNP. He famously said:

“If the percentage relationship falls to the 70 percent or 80 percent area, buying stocks is likely to work very well for you. If the ratio approaches 200%—as it did in 1999 and a part of 2000—you are playing with fire.”

Of course, we all know what happened back then (tech bubble, anyone?). So, Buffett would advocate purchasing stocks close to that 70-80 percent level if possible, and getting up to the 100% level or above starts to tell you the market is fully valued. Going well over that – into the 130% range and above – would tell the average investor that the market is probably overheated and due for a correction. 

You can view this relationship, expressed as a percentage, anytime here. We’re currently at right about 91%. Not cheap, not expensive.

Another, widely used metric is the Shiller P/E ratio. Robert Shiller, a Yale finance professor, is well known in the finance and economics communities as a relatively rational and intelligent person who tries valiantly to quantify the market’s irrationality. He wrote a great book, “Irrational Exuberance”, which is a classic tome on behavioral economics and the stock market’s volatility. He’s just as well known for his Shiller P/E ratio, which uses trailing 10-year earnings, adjusted for inflation. This is known as CAPE (cyclically adjusted PE ratio).

Shiller PE

The Shiller PE has a median of 15.85 and a mean of of 16.45. We’re currently at 21.70. That tells us the stock market is experiencing a bit of euphoria, and probably due for a comedown. You can view the Shiller PE here.

If I were to use market-wide valuations as triggers to buy, sell or hold I would use the above two metrics as some of the firmer methods with which to make my determination as to where I think the market is at and where it might be heading.

Both metrics are telling us the market is a little pricey, though to varying degrees. Buffett’s total market cap-to-GNP ratio leaves a little room in the tank, while the Shiller P/E tells us the market is fully valued here. That gets back to the part art, part science I was speaking of earlier. There is no definitive tool to automagically tell you where the market is going to be tomorrow, next week, next month or next year. Anything claiming as such is completely false.

Now, don’t get me wrong. If the DJIA jumps to 20,000 tomorrow then I’ll probably hold off on buying any equities. That’s not because some individual equities won’t be cheaper than the overall market, but rather because when the market is extremely overvalued it will likely be very difficult to buy any shares in high quality companies below their intrinsic value. However, the market can stay irrational for long, long periods of time. If you face a market that is, in your well-reasoned opinion, expensive and you wait for a better entry point…it could be years or even decades before you find such a point. In the meantime you could have been missing out on rather important time to allow the miracle of compounding..to..well…do miracles.

It should also be noted that as someone who’s trying to retire in 10 years, I have limited amounts of time afforded to me with which to allocate fresh capital to attractively valued shares. My buying schedule, at a monthly rate, is therefore aggressive. I suppose someone with an investing horizon of many decades could be a bit more conservative in terms of their purchasing frequency. I still stick to the point I made above about the stock market’s relentless irrationality, however.

Summing it all up, I view valuation as one of the most important considerations an individual investor must face. Buying overpriced securities can lead to sub-par returns over many years. However, I don’t necessarily view the overall market’s value as the best way to consider valuation on an individual stock because the market is filled with thousands of individual equities all priced differently due to a variety of reasons. You could have a thousand overpriced stocks and a thousand underpriced stocks. But, as someone who concentrates on a rather small subset of stocks, this being dividend growth stocks with long streaks of increasing dividends and strong fundamentals, this limits the universe with which I need to operate in and concentrate my attention. Paying attention to 100 or so stocks and their individual valuations is much easier than trying to pay attention to the valuation of thousands of stocks.

How about you? Do you value the market or individual stocks? Or both?

Thanks for reading.

Photo Credit: Biography

Comments

  1. says

    DM,

    I typically just focus on the valuation of individual companies, but I must confess I do find myself looking at the market as a whole. Kind of hard not to since it’s always in your face. I usually find my price targets but if I feel the market is very toppy then I might hold off a bit on some purchases.

    I hadn’t heard of Buffet’s ratio before. That’s pretty interesting and if it’s good enough for him then I don’t see how I could come up with something better. He’s forgotten more about investing than I could ever hope to know.

    • says

      Pursuit,

      I hear you. It’s hard not to pay attention to overall market levels when it’s all around us. I’ll be honest and I do pay attention to it as well. But, again I simply do not use it to gauge my buying decisions. If the market is up 4%, yet a stock I’ve been eyeballing is down 2% on the same day…I’ll be buying.

      Yeah, Buffett’s thoughts just in any single given day are probably enough to fill my mind for a lifetime. He’s a brilliant soul.

      Best wishes!

  2. says

    You have nailed it. No one value strategy is right for every investor. You have laid out an intelligent and accurate description of a couple ways to use value in individual stock and market analysis.
    I do favor a tactical asset allocation more than you, but individual value is just as important (or more). Both kinds of investing work because they are based on VALUE. That is the important concept for successful investing.

    • says

      Ken,

      Thanks for stopping by.

      You are correct. No one strategy is right for every investor, and sometimes one strategy alone isn’t right for even just a single investor. Depends on many things.

      Value, and the difference between it and pricing, is an extremely important concept for one to understand if successful investing is one of your goals.

      Happy investing!

      Take care.

  3. says

    Great article. For the last year and a half or so I have been pretty consistent about buying some stocks every month, but have been inclined recently to think about pooling my assets more. This article leads me to think it may be a wiser move to pool and move in when the market drops. By the nature of dividend investing I think you have more leeway with these rules than people who are chasing growth stocks. You are buying eminently profitable companies with great track records. I wouldnt stop buying based on either of these rules just yet. But it is something to keep an eye on.

    • says

      Soldier,

      I think “pooling assets” as in building up a cash reserve depends also on the function of your cash, as well as the amount of cash you already have. For someone who can only invest $500 per month…well, pooling is probably necessary simply to avoid too many friction costs. Market valuations would not be of secondary concern.

      I agree that market valuations is something to keep an eye on. It can give you an idea of overall investor sentiment, but certainly not something I would use to make meaningful investment decisions. Macro events are something else I don’t really concern myself with, other than to take advantage of mispricing.

      Best wishes.

  4. says

    I don’t know about Shiller’s rule. It’s too backward-focused for my tastes. Buffett’s measure is very sound. I would say when the measure is between 0.9 and 1.1 to be selective with stocks and recognize the market isn’t cheap. Below 0.9 you don’t have to be as selective. Thanks for the link! I’m going to make it a quarterly check on my views.

    • says

      Headed Home,

      Well, the Shiller PE uses historical data. But, that data is still valuable looking forward, nonetheless. Using an average going back 100 years and knowing that history is likely to repeat itself can tell the individual investor the likelihood, or odds, of the market turning one way or another.

      Unfortunately, anytime we’re trying to value stocks we’re using TTM data and the like…which is looking backwards. Factoring in growth rates are guesses as they’re unknown, and the accuracy, or lack of accuracy, of these guesses can cause the valuation to vary wildly. So, again it’s important to be conservative and factor in some type of margin.

      I’m glad you liked the total market cap-to-GNP link. Buffett is extremely wise…wise beyond even his advanced years. If he likes it, I see no reason to disagree. It seems sound to me, and just one more tool to use if one so wishes.

      Best regards.

    • says

      DM,
      Thanks for the reply. Just to expand the discussion on stock valuation and growth estimates:

      Yes, different assumptions can cause valuation to swing wildy – but the value here is creating caps/goalposts for your target price. If you find a stock that can have flat/negative growth for a period and still come out attractively valued, it’s probably worth buying. Furthermore, you can gauge the probability the market is putting on the company having good/bad growth rates and decide if the probability in the market is better or worse than your guess.

      But to each his own on stock valuation. There is no ONE SINGLE method of beating the market.

    • says

      Headed Home,

      “But to each his own on stock valuation. There is no ONE SINGLE method of beating the market.”

      I think that’s key. As a dividend growth investor, it is not my goal to beat the market. My only goal is to build an ever-growing passive income stream that exceeds my monthly expenses. I plan on never selling shares once I’m retired and living off that dividend income. If I beat the market, so be it. If I don’t, then I’m okay with that too. As long as my income stream is growing YOY, that’s all that really matters.

      So, I think the important thing here is to recognize your goals and see if those line up with your investment strategy. My goal of building an income stream that is constantly growing entices me to find attractively valued stocks every single month, in all markets.

      Just my take on it.

      Best regards!

  5. says

    Like you I also buy based on individual securities valuations (or at least my estimates of fair valuations). I don’t pay attention to the entire market. While the market may be high I just pay attention to the securities I’m interested in and how they are valued. I wasn’t investing back in 1999 I have a feeling most likely the companies I’m interested in were likely overvalued at the time and hopefully I would have been wise and stayed on the sidelines. But right now I feel even if the market is getting slightly high priced, I’m still able to find companies at good prices to get into. Recently I just purchased AFL and NSC for example.

    • says

      Dan Mac,

      That sure would be interesting to go back in time, to 1999 or even before, and see exactly what I’d be investing in. I’m not even saying I’d like to know what I know now. Just to go back in time and start my journey earlier and see how I’d respond to it all would be really fun.

      Of course, looking back I’d obviously love to be able to go back to about 2008 and start it all.

      AFL and NSC both seem attractively valued here. AFL has been undervalued for some time, and I purchased my entire lot when it was in the mid-$30′s. I should have bought more on the way up, but I’m comfortable with my position size.

      I should have probably bought more NSC at the $55-56 level…but again I’m comfortable with my allocation here. I take allocation fairly seriously to mitigate risk, especially as I’m almost 100% long equities. Mitigating risk in any way possible at this level of equity exposure is important to me.

      Hope all is well. Thanks for stopping by.

      Best wishes!

  6. says

    Excellent article. It’s not easy, nohting is easy, but I use already this Market to GNP ratio. In fact it is a Market to Willshire 5000 ratio that you can find for free on Gurufocus.com. I refrain from buying when it is over 93 and correct my errors by selling stupid stocks I might have bought when it approaches 100 to 103. As for stock selections, as you transformed me into a dividend growth investor, I was looking for good stocks like yours, but my screening is returning me nothing these days. Of late, it returned TAP and WPO. I only bought TAP, although not very much convinced of this company. As you, I crosscheck with things like PB PS PE Shiller PE, Intinsic value, and so on, the list is large. A free site I use is: Serenity Stocks, it is free and applies the rules of Ben Graham, as written in the Intelligent Investor. Using this latter site, to grab for ideas and to crosscheck other sites, the like Gurufocus. Another free site I used is: TheGrahamInvestor.com. There you find a list of pure NCAV and other intrinsic stocks, but I am not so convinced of the site, althoug NCAV stocks gave me very good results (forget about Chinese NCAV please, most of them are a scam)

    Hope this can help your readers, although I believe I come late to give any site advices.

    Good to you.

    • says

      Aspenhawk,

      Those are interesting links. Thanks so much for sharing them. I’ll have to take a look.

      The sharing of knowledge is what makes the investor community so wonderful, especially the dividend growth investor community.

      Take care!

    • says

      Aspenhawk,

      Very interesting article. Just goes to show you the lack of efficiency/predictability in the markets. I haven’t been at this for long, and I’m certainly no genius, but I’ve seen the disconnect between macroeconomic events and the market.

      Although, it does look like the Shiller PE can at least give you a fighting chance if you’re interested in trying to time the market…at least according to the findings of the study listed in the article.

      Best wishes!

    • says

      Aspenhawk,

      I meant to add – it always comes down to individual valuations. That’s really where it’s at. Forget about elections, tsunamis and the euro zone. Is a company attractively valued for the long-term or not?

      Best wishes.

    • says

      Yep, Dividend Mantra, I act a bit like you now. One month ago I bought YPF an argentinian oil explorer (former Repsol) bot it at 11, fell to 9,50 or so and as it was belo 52 Weeks-Low I sold 1/2. How I regret ! The unsold half has now risen a lot. Tried to act as some long-term investors, that sell under 52 Weeks-Lows ! I guess that next time I will probably invest less as a first stake, and will sell probably too only if 10 or 20 % under the 52 WL. Most of all I think you’re quite right to concentrate on a small universe of stocks (Dividend growth and quality names with a kind of a Buffett’s moat. I enrage a bit when US stocks go up as of late and USD goes down as this eats almost half of my gains. Hopefully the USD will be strong again, which I doubt, as all fiat money finally goes down to Zero, be it USD, €uros, Yen and so on. Thanks for all your posts !

  7. Anonymous says

    Hi,
    I enjoy reading your comments over the months and, like you, am trying to build a retirement portfolio. Of course, starting at 53, it’s a little harder. I do have other investments, but hope to have this generate my own ‘Pension’ which I won’t have upon retirement.

    I’ve converted several IRA’s to my Roth brokerage account so I the tax aspect won’t affect me for dividend reinvestment.

    One thing I haven’t seen you touch on a lot is valuing stocks with regards to their PE. I find if I like a stock, but the stocks PE is higher than the S&P then I’d wait. Wondering what your view is on this and have you given a look at GE?

    Thanks.

    • says

      Anonymous,

      Great to hear that you’ve taken control of your financial future. We’ve all gotta start somewhere, and the best day to start is today.

      I’m surprised to hear your thoughts on me not using p/e ratios to discuss valuation, as that’s actually something I commonly discuss. I don’t necessarily compare the p/e ratio of an individual stock the the S&P 500, because the p/e ratios for stocks in certain industries are routinely higher than average and some are routinely lower than average…so it’s not an apples to apples comparison. A better comparison would be comparing an individual stock’s p/e ratio to peers and to its own historical average.

      I’ve only looked at GE a few times in passing. Obviously, I wish I would have bought it at $15 when I first looked seriously. I actually owned GE back in early 2010, but that was before I had a concrete investing plan and sold out completely. I’m sure GE will be fine in the long run, but the last I looked I was concerned about the debt load. The dividend cut burned a lot of investors, but they were heavily tied up to the financial crisis due to GE Financial. As far as I know they’ve since wound down some operations at their financial arm, and that’s a smaller division now than it was before the crisis hit. I’ll have to take another look at it. They’ve always been a good company shareholder-wise, as buybacks and dividend increases were always a priority. They just raised the dividend almost 12% recently.

      Best wishes!

  8. says

    If I was a pure index investor, I’d rebalanace the portfolio with a varying stock/bond allocation based on the shiller P/E. Backtested over 35 years, this would have been both market-beating and less volatile than the S&P 500. For my 401(k), which is purely indexed, I generally just let it be as a lifecycle fund, but if we have valuations on either extreme (like 1999 or 2009), I’ll intervene and re-allocate it.

    For my individual stock portfolio, I keep an eye on the shiller pe (and usually update investors in the monthly newsletter about what level it is), but it’s only a broad check. If the market value is high, it’s harder to find attractively valued stocks, but it still comes down to trying to find attractively valued stocks anyway.

    The nice thing about the market cap/GNP and shiller PE methods is that if you overlay the long-term charts of both of them over the same time period together, they’re rather close. Since neither is an exact science, and they both generally have the same conclusion at any given time about the market, they can be used interchangeably for the most part. Out of the two, the current Shiller PE is usually quicker to look up.

    • says

      Matt,

      “If the market value is high, it’s harder to find attractively valued stocks, but it still comes down to trying to find attractively valued stocks anyway.” –

      That’s the essence of the article. While using overall broad market valuations is a good check “on the weather” if you will (is there a storm approaching…or is it rather a sunny disposition?), it still ultimately comes down to finding attractively valued stocks if you’re investing in individual companies (rather than index/bond investing and rebalancing).

      I would agree with you that the Shiller PE or the market cap/GNP charts can be used interchangeably for the most part. I think that, overall, they’re just one tool of many that the individual investor can use to make intelligent investment decisions. I wouldn’t refrain from investing capital if the Shiller PE ratio was showing 30 and equities were overvalued as an aggregate, but rather the likely overvalued equities I’d be looking at specifically would preclude me from allocating any fresh capital towards them.

      Best wishes!

  9. says

    Thanks for writing this article, it’s very useful. I’ve never heard of the market value to GNP ratio before. I bookmarked the site and will keep tabs on it from time to time. Usually if the market is high I’ll know simply because there are few attractive prices to choose from. I love when the market is low since it’s so easy to find good buys. Not knowing which company to buy because they all look attractive is a great problem to have! November 2011 is an example of that.

    • says

      Compounding Income,

      I’m glad you enjoyed the article. It was a lot of fun writing it.

      Having too many attractively valued individual stocks is definitely a nice problem to have, and I remember late 2011 fondly. I was hoping we’d have a revisit of that, but unfortunately have not been so lucky late this year. I also remember 2010 being a wonderful time to get started, although not as nice as 2009 would have been.

      The market has been steadily marching upwards for the last three years, much to my disappointment. I still see some opportunities out there, however, so am looking forward to hopefully deploying some more capital before 2012 ends.

      Best regards.

  10. says

    I also try to value individual income stocks, and do not really pay attention to the markets. Of course, when market averages go down 10%-15%, it is much easier to find attractively prices stocks to buy. But even during the 1998- 2000 bubble valuations, there were quality income stocks to purchase.

  11. says

    DGI,

    I’m with you. When the market goes down significantly, it is of course easier to find value out there.

    I love when a stock I’m looking at is attractively priced, and I overlay it’s YTD performance with the S&P 500 YTD, and I see a divergence of -10% to -15% for the stock in question. It’s underperformance like that I look for, and what comes to mind when I think of this article and why I wrote it. The S&P 500 could move up 50 points from here, but if JNJ goes down by $5 per share I’m going to buy JNJ.

    Best wishes!

  12. TiglatPileser says

    Thanks for writing this very instructive and useful article!

    Trying to answer your question at the end of it for myself made me clarifying my own position. In many cases – being an individual investor with its own time-horizon and with its own interests which are not necessarily the same as the interests of big investors or of fund managers – I have found the basic rule “Keep it simple” very useful. Therefore I watch main indices but I do not necessarily base my investment decisions on them. Although I try to sell more of the stocks that I am not comfortable with any more when I feel that the market has reached fundamentally rather unjustified heights. But on the other hand: I like buying things way to much and it has proven to be beneficial to my financial health a lot more to buy dividend paying stocks than to spend the money on books, going out etc.

    Actually I remember some remarks that Peter Lynch made in one of his books. Trying to reproduce them as correctly as possible: it’s the best time to buy stocks when you go to a party and you are ashamed to tell your profession to the other guests because when they hear “fund manager” they turn away quickly ignoring one for the rest of the evening (still licking their financial wounds probably). It starts getting a little bit shaky when you go to your dentist and he wants some stock recommendations from you. Sell as quickly as possible when you go to your dentist and he starts giving stock recommendations. I believe that Lynch has touched in his entertaining style a very important point indeed. When I think back: whenever the market was about to collapse soon people were talking about stocks all the time, even on the front pages of the tabloids news about indices and market gyrations did push away sports news or news about actors/actresses or big boobs. This is not a tool for timing the market precisely which I regard as a futile enterprise for an individual investor but I think these are ovservations that can give you a feeling for the overall situation.

  13. TiglatPileser says

    Why is the market important for us? Analysing the success of Warren Buffett I think one important point is: he had money when all the others needed it. Look at the crisis of 2008: several respectable institutions like Swiss Re etc. needed money desperately – and Berkshire stepped in securing nice profits being able to buy shares of definitely undervalued businesses. Very often the time waiting for the upswing in the markets was sweetened for these astute investors by the guaranteed interest or preferred dividends the borrowers had to pay. And if I remember correctly Buffett not only did what he did, he publicly recommended to invest at these distressed times. One has to thank him for doing that. By the way: most property is reallocated during crises.

    Another thing I have experienced: during the last decade I have already experienced two so called “once-in-a-lifetime” crises – and if I were sure of one thing only this would be it: there are more to come. I don’t want to discuss the change in stock exchanges with all this automated selling and buying in the split of a second and the change of mentalities here but I have observed for quite a while that crises happen more often, that they happen with higher amplitudes and that they happen more suddenly. Furthermore I have observed a higher coincidence of the different asset classes – when stocks are down bonds don’t go up naturally any more (with the exception gold and some commodities of course).

    My most successful investments have been companies (usually smaller ones) that have managed to grow consistently and have raised their dividends accordingly eg Gesco (a German conglomerate specialised on buying so called Hidden Champions and holding them for ever), Fielmann (eyeglasses), init (telematic systems), Fresenius (medical technology), Canon, Cochlear, Philip Morris (when the anti tobacco movement was at its heights in the US) which has emerged since my first buys into shares of Altria, Philip Morris International, Kraft, Mondelez, Ralcorp. My worst investments have been companies where the management either was prating about shareholder value all the time (forgetting business or customers) or where the management didn’t pay dividends spurring growth instead (so they said), usually ending in senseless share buybacks at the time of high prices which were followed by issuances of new shares during the times of a crisis at ultra low prices diluting my ownership immensely.
    Problem: I can’t get companies which I prefer (rather smaller than bigger, hidden champion, honest management, partly owned by a family, planning for centuries not quarters, growing dividend) at the moment at a reasonable price. For quite a while good large and mega caps that had a respectable history of paying and increasing dividends consistently were rather cheap (P/E in the single digits) but I feel that this is changing rapidly at the moment . Maybe it might be a prudent strategy to start hoarding money to be prepared. I won’t do that I guess or at least I won’t do that consequently because as I have already said I like buying stocks every month way too much. However hoarding money and reducing new buys might be the appropriate strategy for now.
    Best wishes!

    • says

      TiglatPileser,

      Thanks for stopping by and providing a great comment there. A lot of information to dissect! :)

      First in regards to Peter Lynch I actually ran into a similar situation myself. I was riding the bus a few months ago and there was a guy who looked to be of relatively modest means telling anyone who would listen about how great gold is. Gold is amazing, it’s beautiful and it’s the best investment you can possibly make. Is that a sign that gold should be avoided? Perhaps. But, who knows really?

      I agree with you on Buffett. Having readily available cash during times of crisis is handy indeed. And I don’t think it’s a bad strategy to limit purchases during times when there are less values to be found and increasing cash deployment during times of profound value. My only argument would be where’s the value? In the market, or in the individual stocks?

      If the market is up but you find a gem of a company trading at a cheap price do you hold tight for that downturn or pounce on the opportunity? These are all individualistic questions and we all react differently. What I try to do is focus on what I can control. I can go to work and earn a certain salary. I can control my expenses and maximize the amount of free capital I have with which to invest. I can then control how I invest that cash.

      What can I not control? Macroeconomic changes. Political maneuvers. Changes in national policy. Broad market moves up or down. The market itself. Interest rates rising or falling. Natural disasters.

      I focus on myself and I try to buy high quality companies that are trading at what I feel are attractive prices for the long-term. If the market crashes 50% tomorrow I’ll only try to buy more. Trying to guess is a fortune teller’s game…and I’ve never met a rich fortune teller.

      Thanks again for the wonderful comments. Much appreciated as I do quite enjoy discussions like this.

      Best wishes!

  14. says

    Over the long run, stock market valuation reverts to its mean. A higher current valuation certainly correlates with lower long-term returns in the future. On the other hand, a lower current valuation level correlates with a higher long-term return.

    • says

      Glendale,

      Absolutely. The broad market is currently sitting a bit above the historical mean, so a correction is coming sooner or later. Future returns from here look tepid, at best.

      Best wishes!

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