Warren Buffett Isn’t Excited About Buying Stocks Right Now, Should You Be?

In a recent interview with CNBC, Warren Buffett advised that he’s having a hard time finding any bargains around. He believes stocks right now are “more or less fairly priced” after a significant run that started back in early 2009. With the stock market at all-time highs, I’m inclined to agree with Buffett.

While I refrain from valuing the market as a whole because I’m not an index investor but rather an investor who purchases shares in individual businesses, an expensive market is unfortunately generally filled with expensive stocks. But there’s always a value or two that an enterprising investor can focus on, if one looks hard enough. You can go to Saks Fifth Avenue and speculate on the how overpriced the entire store is because it’s mostly filled with expensive merchandise, but you’ll still likely find a cheap shirt or two on one of the clearance racks in the back.

And that’s really what us value investors try and do: find a sale in the midst of otherwise expensive merchandise. Obviously, right now that’s pretty difficult seeing as how a rising tide lifts all ships and the market’s tide has been on a relentless push upward for over four years now. Where bargains were easy to find when I first started investing back in early 2010, they are now quite difficult to come by. For perspective, the S&P 500 is up over 130% since the lows of March, 2009.

Taking a look at the cyclically adjusted Shiller P/E Ratio, we can see it’s currently at 24.45. That’s rather high, and potentially portends a pullback in the broader market, and with it most stocks within the market. As always, caution is warranted when we see anything at all-time highs. While Jeremy Siegel, the well-known Professor of Finance at the Wharton School of the University of Pennsylvania, has recently taken issue with the Shiller P/E Ratio, no matter how you slice it long-term investors would be wise to be extra cautious about how much they’re paying for assets today.

They more you pay today, the smaller your future returns will be. Furthermore, the more you pay the less shares you’ll receive for the same amount of money, and therefore the less dividend income you’ll receive from your initial investment which can then be reinvested back into your holdings buying even more assets. Obviously, it pays dividends both literally and figuratively to be aware that price and value are quite different.

If stocks are expensive, what do asset accumulators do right now? Well, usually it would make sense to focus on other asset classes when stocks themselves are generally expensive. However, this might not make a lot of sense right now. Gold produces no income and I’m of the opinion that it’s a horrible investment. Real estate, like stocks, has largely rebounded after the burst of the housing bubble that preceded the Great Recession. So, it might be tough to find undervalued real estate right now. In addition, buying and selling real estate takes great confidence in one’s knowledge of a local market and is usually much more capital-intensive than investing in stocks, all while having higher friction costs in the form of commission fees. You also have leverage involved and greater risk due to exposure to a more concentrated asset base. Of course, you could also buy rental houses and turn your real estate investments into income-producing assets, but being a landlord is certainly more hands-on than stocks and definitely not for everyone.

Bonds are also pretty tough right now. The yields are historically low after a huge bull run in bonds over the last 30 years or so, and the face value on today’s bonds are likely to only decrease over the long haul. Even if you hold to maturity, you’re exposing yourself to historically low yields. Then there’s cash. Of course, cash produces no long-term returns and instead will only decline in value due to the ravages of inflation. On the other hand, it may make sense to build up cash when most other assets are overpriced as this provides an individual investor the flexibility needed to pounce on opportunities when they become ripe. If you’re busy buying overpriced assets and the market corrects to a mean and you have no cash with which to buy now fairer priced securities, you’re putting yourself at risk.

I’m following the latter strategy right now: building up cash. While I still believe in purchasing high quality dividend growth stocks on a monthly basis so that I can build up an ever larger passive income stream with which to reinvest and compound my gains, I also believe in not overpaying even for high quality. And right now, high quality is generally expensive. Most high quality companies that have long track records of raising dividends are generally selling close to 20 times earnings, and some even higher. Examples include Johnson & Johnson (JNJ) at 20 times earnings and The Coca-Cola Company (KO) at 21 times earnings.

Total returns for investors come from advancing share prices and dividends received. The share price increases come from larger earnings assuming a static valuation, or P/E expansion when purchasing undervalued securities. I’m simplifying it a bit there, but that’s generally how it works. Obviously, it’s difficult to assume much from the latter so you’re largely looking at earnings growth alone to increase share prices for most companies right now. I prefer a margin of safety so that even if I’m wrong and earnings are flat, I’m receiving a good yield from my investment so that I can reinvest back into an undervalued security thereby compounding at a rather effective rate. It’s tough to do this when you’re paying a premium.

I’ve been rather inactive this month, only adding to my position in Realty Income Corp. (O) on what I felt was a reasonably attractive price on a long-term basis. And scanning my portfolio and the market for further opportunities, I feel like I’m in the same boat as Warren Buffett. I’m not particularly excited about anything I see, and I’m having a hard time finding anything to purchase.

Looking at individual opportunities, I felt Philip Morris International (PM) was attractively priced in the low $80’s just earlier this month, but after a dividend increase and investors apparently also noticing the value PM has jumped over 7% and is now priced above $90 per share. I passed up what I felt was an opportunity only because PM is already my largest position and I didn’t feel very comfortable allocating more capital to the company here. I currently think Kinder Morgan Inc. (KMI) is attractively priced for the long haul at just over $36 per share. The shares have taken a hit after hedge fund Hedgeye has alleged that the firm is not spending enough on maintenance and the share prices on all of the Kinder Morgan investments are overpriced. I disagree and if I wasn’t already also heavily allocated to KMI I would be adding at today’s prices. With a yield of 4.42% and heavy growth on the back of the Incentive Distribution Rights (IDR) payments investors stand to do well here. I also think Exxon Mobil Corporation (XOM) and Wal-Mart Stores, Inc. (WMT) offer reasonable value.

In conclusion, Buffett isn’t excited about buying stocks at today’s prices. And I’m not either. While I’ll continue to selectively purchase equities that make sense on a valuation basis while also making sure I’m not over-allocating to any one position, I’ll also keep these selective purchases smaller than usual as I build up my cash position waiting for cheaper stocks that offer larger margins of safety, and hence higher yields and more attractive long-term returns.

How about you? Excited about buying stocks right now?

Full Disclosure: Long JNJ, KO, O, PM, KMI, WMT

Thanks for reading.

Photo Credit: CNN Money

Comments

    • says

      There are always pockets of opportunity in any market environment. Creating a large cash cushion might not be the best thing to do, particularly if stock prices rise even further from here. IT would be very difficult to hold an increasing cash position if stock prices go higher from here. You see, the market can stay irrational for far longer than you can stay solvent.

      I have been hearing form investors that they are waiting for that crash for 4 – 5 years now. I cannot imagine what type of person you must be to be wrong for 4 – 5 years and counting, and still stick to it..

      Of course, as a net buyer of stocks, I would be more than happy if prices correct 20% or more over the next year or so. However, as I find values ( I guess I am not as patient as Buffett), I keep deploying my funds every month.

    • says

      FFDividend,

      I’m still buying selectively, but also allocating a little more to cash than usual. This isn’t out of a desire to time the market, but rather simply because there is a lack of value from where I’m standing.

      Hopefully we’re both well prepared for a broader market pullback, if one occurs.

      Best wishes!

    • says

      DGI,

      Well, I’m still a net buyer as you are. However, the only difference for me right now is that I’m not allocating 100% of my free cash flow to high quality dividend growth stocks. I’m not planning on shutting the faucet of cash off, but rather slowing the stream down a little. I have just as much ability to predict the future as anyone else, but I do think that values are hard to come by right now. In response to that, the only thing I can do is to stick to my guns and avoid overpaying for assets.

      I’m in the same boat as you regarding a correction. I wouldn’t mind at all seeing a 20% correction, bringing many high quality assets back into a range at which I’d consider myself an exuberant buyer. While my account would take a $20k+ hit, I’d be able to put new cash to better work.

      We’ll see what we get!

      Best regards.

    • Steve says

      Likewise, I’ve been hearing/reading people saying that they’re keeping “dry powder” in the form of cash since 2011 because they are sure we’re due for a “major” pull back. Well, it hasn’t happened. Meanwhile, stock prices continue to climb. Even if the market DOES pull back in a few months to a year, whose to say that it will pull back to these levels? The biggest problem with this strategy is the unknowns. We simply don’t know.

      My strategy is always to buy. When I have cash I don’t save it. I buy. I may be buying when stocks are expensive but if I continue buying I know I will catch the market corrections which will average out the expensive purchases. I just don’t see how waiting to deploy cash makes sense.

      That’s my take.

    • says

      Steve,

      I hear what you’re saying, but I still think there is always room for reason. For example, if your strategy is to “always buy” and the market advances another 100% from here and every stock you see is clearly overvalued do you still buy, even knowing a large correction is likely based on 100 years of history?

      It’s tough for me. I continue to buy because I don’t think equities are completely unreasonable as a whole right now, and besides I see no other asset class even close in terms of returns over the long haul. However, my buys will likely be less in frequency and amount until values start to really excite me again.

      Best wishes!

  1. Anonymous says

    How much cash should a long-term dividend investor have for the bear market? That’s of course an impossible question but what kind of cash reserves you guys have?

    Currently I’ve got 90% in stocks and 10% in cash and I’m thinking of letting some shares go…then again I’d really like to keep my good dividend stocks :I Someone warned about getting emotional with stocks but can’t help it.

    • Anonymous says

      If you’re buy and hold, just hold the stocks you have (particularly if you have a long-term, more than 10 year focus for this money), continue buying (but less so – say only buy using 70% of your money), and squirrel away the remainder that you’re not using to buy aside for an eventual market correction. That way, you continue to buy, and you build up a cash cushion to take advantage when the day comes (up to a point – set a cash limit where you’ll stop hoarding cash in advance, and a P/E ratio for the market as a whole or stocks you’re interested in specifically that you’ll use as a trigger to start moving back in).

      As always, having a coherent, non-emotional plan and sticking to it is the secret.

    • says

      Anonymous I,

      I’ve been almost 100% invested in equities since I first started my journey. Lately, the cash allocation has been building and I’m somewhere around 5% cash right now. I’ll likely continue buying at a slightly slower pace until cash builds to 10%. If equities continue rising from there I’ll have to reassess my situation.

      It should be noted, however, that I don’t plan on selling anything. I didn’t mention anywhere in the article above about selling and I highly recommend not trying to dance in and out of high quality businesses. That’s likely a dance you won’t do well at. I continue to be a buy-and-hold guy, but the buy side is just likely going to be a bit lighter until we get better priced equities.

      I hope that helps.

      Take care.

  2. says

    Hey DM, wise to not good against the good gospel preachings of WB. Here is Australia we have been enjoying high rates of interest regardless. I just looked at a mortgage yesterday at 4.49% and last weekend I opened a high interest savings account at 4.51% also. You read that right, a savings account with a higher interest rate than lowest mortgage rate. Not too bad and with the savings in my wife’s name we pay no tax on the interest. We don’t face such a large penalty for stuffing cash down the barrel of the ‘elephant gun’ having it ready to fire when a target advances into range.

    I cannot wait to start our DG portfolio but that will wait until we have a mortgage and are subsequently are mortgage free. However, I will start in earnest if the markets completely tank…like a 50% sale of baked beans I will be putting as many tins in my trolley as I can fit! I don’t care what the checkout chick thinks.

    • says

      KM,

      You have a great situation there. To be able to borrow money at a cheaper rate than what the bank is paying you on your money is quite amazing! That goes against Economics 101, doesn’t it? I’d take advantage on that as long as you can. :)

      Here it is tough to build up the ammo for an elephant gun. Rates on cash are very low, so investors are forced into equities because there aren’t many better options out there. I would say that real estate is the closest right now, but I’m still much more bullish on stocks than real estate over the long haul. Due to everyone being funneled into equities the prices are high and the yields are low. It’s unfortunate, but it’s a challenge I look forward to navigating.

      Good luck over there in Australia!

      Cheers.

  3. Anonymous says

    Hi DM;
    Just wondering what your thoughts were on Intel, I am becoming very impatient with this company. No share appreciation to speak of and now no dividend increase.

    Bill from Wmsport

    • says

      Bill,

      I’m also becoming impatient. I’m waiting until later this year and into 1Q 2014 to see how the new products do. If I don’t see any traction I’ll likely move on. The lack of a dividend increase isn’t surprising considering the lack of visibility on how some of the new products will do. Besides, they’ll still pay out more this year than last year, so the dividend streak will remain intact (as far as I’m aware).

      Overall, I’m less concerned about the state of the dividend and more concerned about the state of the new products. The viability of strong growth going forward hinges on the company’s ability to navigate away from PC’s and towards mobile computing.

      Best wishes.

    • Anonymous says

      Personally I am super excited about INTC. Just keep collecting the dividend and don’t worry about the stock price. From what I hear INTC is nearly 2 generations ahead of TSMC in IC fab technology. What does this mean? The ability to manufacture lower power, faster, and more complex Integrated circuits – all key for the future of mobile. Who cares about near term stock price? Aren’t we in it for the long haul?

      Roger H

    • says

      Roger H,

      Actually, the more I look at INTC the less I like it. I actually sold part of my position today and I’ll be talking about that tomorrow. They just announced another dividend that is currently frozen and they have now been passed in global revenue by TSM. I keep hearing about how great the chips Intel manufactures are, yet the inroads in mobile have been lackluster to say the least.

      I’m in it for the long haul, but technology moves quickly. I’ve been a shareholder for over two years now and Intel has done very little in that time.

      Best regards.

  4. says

    Hi DM,
    I completely agree that the values are getting a little sparse in the equity space. I have found a couple underpriced small caps that worked earlier this summer…..one was even a true net-net, but otherwise I’m just holding a few of your dividend growth style companies. Keep your wishlist up to date and we’ll all get to snag some values eventually. I struggle with being impatient waiting, but try to take solace in Warren Buffetts assessment that “investing is a game where there are no called strikes.”

    -Bryan
    fastletter.blogspot.com

    • says

      Bryan,

      I take solace in not taking any strikes either. :)

      I’m definitely going to keep my watch list handy. I’m not sure if we’ll see a correction any time soon, but I’ll continue my window shopping in the meantime.

      Take care!

  5. says

    DM aside from piling up cash one additional option would be to pay down debt (for those of us that have any). I have been funneling my excess cash toward debt for several months now and have been very pleased. Yes maybe I missed some good run-up opportunities but with my specific situation, I could retire if I was debt-free. So there is great incentive there for me.

    • says

      Investing Early,

      Great point! I should have probably addressed that in the post.

      I agree completely. If you have debt to pay off, it probably makes sense to tackle that first. Some might make the argument that mortgage debt would be an exception, but it’s a guaranteed return paying it off. I only have some student loan debt currently, and it’s at a very low rate and also tax deductible. So I’m not in a big hurry to pay it off. But if we keep going up from here I might have no choice.

      Best wishes.

  6. Chad says

    Without too many great options right now, I’ve been overpaying on my mortgage and prefunding some of my yearly expenses. Now I have my property taxes that are due in January set aside. If the market corrects by 20% or more, I’ll just quit overpaying on the mortgage and use some of my property taxes that are set aside for some great values.

    • says

      Chad,

      Great plan there. Very similar to what Investing Early was talking about. I like what you’re doing. Paying off the mortgage early is a guaranteed return. In a cheaper market you would likely do better by investing as much as you can, but spreading some of your chips around and paying off mortgage debt isn’t a bad idea right now.

      Best regards!

  7. says

    I’ve been purposely holding off on investing at this point. Not just because I think the market is overvalued, but because we may need the cash in the near future. If I did have extra money to invest, I know I wouldn’t feel too great about the prices out there right now.

    • says

      Jake,

      Well, if you need the cash there isn’t much you can do about that. Obviously, money you invest in stocks should be money you can afford to lose. If you have other objectives to accomplish first then you should definitely get those taken care of first.

      Good luck!

      Take care.

  8. says

    I couldn’t agree more. I’m trying to find a home for some money right now and am having trouble pulling the trigger because every chart I look at looks like the Matterhorn. (At least the uphill side.) I’m really hoping for a nice dip so I can dive in…

    • says

      Nick,

      I’m hoping for the same dip as you. Although my current holdings would take a hit on paper, my available cash to invest would go much further. I hope we see some cheaper equities soon. :)

      Cheers!

  9. says

    I’m foaming at the mouth to buy some stocks. And I’m foaming at the mouth to sell some puts. But almost everything is overpriced.

    I put a limit order out for BAX recently, and of course the price went up. Which seems to happen every time I place a limit order. I’m also eyeing some REITs, which appear to still be at fire-sale prices. But I put most of my annual bonus into REITs a few months ago and I’m apprehensive about getting over-weighted in the REIT sector.

    If I don’t make a September purchase, it’ll be okay. Maybe October will be a good month for me.

    • says

      MFIJ,

      I share your enthusiasm! Unfortunately, it’s tough to find anywhere to put that enthusiasm to work.

      I’m with you on REITs. That’s mostly what I’ve been buying lately. However, I don’t want to go too crazy here. I’m comfortable with REITs making up about 5% of my portfolio, so I’m going to look elsewhere for the time being.

      I hope October will treat both of us well! :)

      Best regards.

    • Scoonie says

      Well, it looks like there may be a government shutdown in the next few weeks, which could lead to the market plunging. Lots of craziness in Washington right now by a certain political party, which could lead to a good buying opportunity for us investors.

      I am wary on buying anything until we see what happens with a potential shutdown.

    • says

      Scoonie,

      I try not to base my purchasing habits around government budget resolutions or anything like that. I focus on company fundamentals and valuations solely, because there is just so much noise out there. If you let it all in you’ll go deaf.

      Furthermore, I recall many thinking the fiscal cliff was going to be doomsday for stocks and it was rather a nonevent.

      Good luck! I do hope you’re right, as I’d love to see cheaper stocks. :)

      Take care.

  10. says

    Hi, RGR, BP and F seem like decent values today, however, I sincerely agree with the accumulate cash and pounce later approach, keep up the great work!

  11. says

    Actually DM this creates an opportunity for a question: When the market is as it is today, overall, what do you think would yield better results or do you think there is a good study on doing something like using Sharebuilder and dividing among all current holdings $10, $20 or whatever equals the amount of cash you have on hand VS accumulating cash and using it when prices drop. I think this smells a lot like the dollar cost averaging argument the fund guys throw out which I agree with partially (except for the few purchases I have done in the past few months where the prices dropped from 5 to 12% on a single stock).

    • says

      Katz,

      Well I believe wholeheartedly in dollar cost averaging. That’s essentially what I’ve been doing since the beginning. I’ve tried to accumulate enough cash for a purchase (say $1,200 or so) and buy what I thought was the most attractively valued opportunity I could find at the time, while also considering objectives and portfolio weightings. That being said, I don’t mind if the cash position builds up a little more than usual.

      Besides, I have a car to buy. :)

      Best regards.

    • says

      Manefla,

      I like MO here, and recently bought it at a similar price to what it’s trading for today. A generous yield backed by some pretty stout dividend growth. Not much to dislike, but I do think they need to make big moves in the e-cig market soon. I’m anxious to see how the MarkTen product catches on.

      Best wishes!

  12. Anonymous says

    I buy something on a regular basis Now the ones I bought high years ago are higher now and dividend is more than I had last year Just shop yield and dividend growth and two years from now you will say to yourself “well done”

    • says

      Anonymous,

      Great way to keep perspective. While many equities may seem expensive now, we’ll be looking back 10 years from now wishing for $40 Coke and $90 PM.

      Keep up the good work.

      Best wishes!

  13. says

    DM,
    I’m in agreement with you here. I’ve actually been in the reverse position where I heavily invested early in the year, and slightly increased my margin position, which I’ll now be paying down given I don’t see much value in the markets at this time. The first 3 months of the year were particularly heavy in terms of new purchases. I’m looking forward to building up my cash balances for the rest of the year and taking a fresh look at the market again early next year.
    Best,

    • says

      Integrator,

      Great job investing when many high quality companies were cheaper. :)

      I’m looking forward to continuing my strategy of selectively purchasing shares in the most attractively valued high quality companies I can find, but I’m also looking forward to building up the cash balance a little higher than usual. Staying flexible may be prudent right now.

      Good luck!

      Cheers.

  14. Spoonman says

    “But there’s always a value or two that an enterprising investor can focus on, if one looks hard enough.”

    Yup, my thoughts exactly. I am very thankful that “O” remains within striking distance, I just hope that it doesn’t get away from me soon. This whole market is trading on Fed actions, I can’t wait until QE narcotics get taken away and valuations come down to earth a bit.

    • says

      Spoonman,

      I’m with you. I can’t wait until the “high” that easy money is providing the market is taken away and we can get back to reality. :)

      Hopefully I’ll be fairly liquid by then!

      Best wishes.

  15. gibor says

    Jason, I agree that S&P went up a lot, but maybe it’s worth to take a look at TSX stocks that advanced much much softer than S&P?!
    Regarding 20%+ pullback,,,,,I personally don’t believe it gonna happened…..after 2008-09 Feds won’t let it happen. Maybe I’m wrong, who knows…. but if it really happened, how would you know when to enter the market? To tell you the truth, I’d have problem with it….

    • says

      gibor,

      I certainly like some Canadian stocks, and am interested in adding to my BNS position at the right price. I missed it the last time it dipped down to the mid-$50’s. Hopefully I’ll see that price level again and I can add!

      Best regards.

  16. Anonymous says

    Took2summit here,

    I agree the value is few and far between. The food sector has noticed sell offs lately mainly GIS, KRFT, K, and the one I’m specifically interested in CAG.

    CAG seems pretty attractive to me here. If you just look at the PE you would see it at 19, however the forward PE which is more important in my view is only 11. Also, the 5 year estimated earnings growth is 10.2% which is phenomenal for the food sector. The entry yield is also nice, the ONLY downside is the dividend cut they had to do in 2005. However, I think selectively it is okay to look past this as their dividend history before 2005 and after 2005 is obvious. I think GE is similar which you are invested in.

    Also, CAG has dropped about 20% in the last month. I think it’s worth you looking at and attractive right here right now.

    Took2summit

    • says

      Took2Summit,

      I haven’t really looked at CAG before. Taking a quick look just now, I found the dividend growth over the last few years to be relatively lackluster considering the yield level. It trades a lot like SYY, which has also been lackluster for me.

      There are also concerns among investors that they may have overpaid for Ralcorp. Any thoughts on that? The balance sheet also doesn’t look all that great just from a quick glance.

      Definitely something to think about, though. I really appreciate you dropping by and sharing the idea. I love new ideas and perspectives. I’ll have to take a good look at CAG soon.

      Take care!

  17. says

    I think you need to be careful here. A lot of stocks are advancing due to P/E expansion not earnings increases. Here’s an example. In 2011 JNJ traded at $61 with a P/E of 15 and a dividend yield of 4%. The long term earnings growth rate for this company is on the order of 7%. Paying 15X for a company with a potential of 7+4=11% earnings return is not bad.

    Today, you would be paying nearly 20X for earnings return of 7+3=10%. This is the upper limit of fair value. Note that JNJ has come down from $94 to $88 so these numbers were even worse recently.

    I recently bought more PM. With a 4.2% yield and a growth rate (earnings increase + share buy backs) of at least 10%, this equates to an earnings return of 14.2%. (I recently bought just before the dividend increase which I got in at a slightly higher yield of 4.5%). At a P/E of under 17, it’s easy to make the case that this company is in buy territory.

    • says

      sfi,

      Great points there. Valuation is extremely important, and what you pay for future cash flow will directly impact your returns. It’s paramount to not overpay, even for high quality.

      I hear you on PM. I strongly thought about adding to my position. I just couldn’t do it, as PM would have been near 10% of my portfolio at that point. I just don’t feel comfortable with one company having that much of an impact on my income. Great buy, however!

      Best wishes.

  18. says

    I plan to continue purchasing new shares on a monthly basis, but the amount invested may be lower than deposits + incoming dividends combined. I see some companies currently trading at reasonable prices. TGT and XOM come to mind. Both those companies are dividend champions with amazing streaks. I know you’re not a fan of Target, but I think it makes a nice complement to WMT and I am lacking positions in the consumer disc. sector.

    I think Buffett has a point here and I have no plans to go on a wild buying spree at the moment. Q4 provided some great entry points the past couple years with all the talk about budgets and fiscal cliffs. Remember the last few weeks of December 2012? Who would have thought the stock market would reach new heights in 2013!

    We’ll see what happens, nobody knows!

    • says

      CI,

      I’m thinking of looking a little closer at TGT. I’m not a huge fan of retailers in general, but it might make a good complimentary holding to my small position in WMT.

      I hear what you’re saying, and I’m basically in the same position. I think right now might make a good time to refrain from investing 100% of available investment capital and spare some of it for better opportunities. I’m still interested in buying for certain, but as you state I’m also not looking to go on any buying sprees.

      We will see what happens. Perhaps the new fiscal fight will bring about some better values, or perhaps it won’t. I’ll just keep my eyes peeled for deals, just like you. :)

      Best wishes!

  19. Anonymous says

    You’re not bipolar are you? :)

    You should go back and read some of your June posts & comments. Back then, you were positively giddy about the opportunities, the “value” to be had, how depressed “Mr Market” was, etc….

    For example:
    June 13 – “I’d be looking to buy (XOM) shares if they can dip down to the $87-88 level”. Well guess what? Today XOM is $87.42 (and hit $86.96 at 2pm today). Why not buy buy buy!!!?

    June 26 – “if O can get back down to that $40 level, I’d be highly interested in adding.” Guess what? O hit $39.86 today. Now you agree with Buffett that value is tough to find? lol

    June 20 – “I like BP and its very cheap here.” BP is down -0.28% since that comment. Even cheaper than when you declared it cheap.

    June 20 – “Big oil are all on my mind” XOM down -3.96% since that comment.

    GE, since the June 20 purchase is only up 1.25%. It was great value then… surely 1.25% over 3 months later isn’t expensive. Probably cheaper now than it was then if the company is performing at all.

    I like your blog. I hate to be hard on you, but dude… if a person read this post and went back and read your comments in June, they’d swear you were a different person. Very inconsistent… and only 3 months later.

    • says

      I’m not D. Mantra, and I don’t want to hijack his site, but I do want to point out the obvious:

      -Realty Income (O) – He already bought shares this month below $40.

      -General Electric (GE) – Last month the WSJ reported GE wants to spinoff part of GE capital. Pretty easy to imagine a scenario where a conservative shareholder might consider waiting on that.

      -Exxon-Mobil (XOM) – Perhaps a lousy earnings report might have affected his valuation on the stock? I know my personal fair value on that stock is now lower than it was from the quarter you quote.

      Changing opinions over time is very consistent with an investor who performs research. These quotes are not from last week… it appears you went digging here.

    • Anonymous says

      I didn’t go “digging” here.
      I started reading this blog around June and I was struggling to understand then how he was getting so excited at all the “deals” those first few months I was reading (i.e. JUNE, when I pulled all those quotes from). I felt the market was overvalued at the time, and couldn’t find much interesting THEN.
      I chalked it up to different opinions and different viewpoints. And, that he preferred to buy rather than sit in cash… so he could start collecting dividends.
      Imagine my surprise when I now see a very different stance here versus those comments in June. And the reference to building cash.
      Changing opinions over time due to research is hugely different from declaring stocks “cheap” and “deals” in June, and then agreeing with Warren Buffett that there is not much to buy 3 months later. You can justify if all you want, but I too value stocks, and I am skeptical of that explanation in this case. Go back and read nearly ANY post/comment in June. I’m not cherry picking… I just got tired of Copy/Pasting.
      How much did your “valuation” of XOM change on a single quarterly earnings report? I’m fascinated by this. I doubt that Dividend Mantra’s valuation could change all THAT much from a single quarter… since he’s all about the long term… and if he felt these companies were such screaming deals less than 3 months ago.

    • says

      Anonymous,

      I appreciate your perspective, but I think you’re way off base.

      I’m a huge fan of equities over the long haul, and that’s why ~95% of my wealth is tied up in stocks right now. I’ve been very open about my bullishness on stocks many times, and you can read an article about just one reason why I love stocks so much here:

      http://www.dividendmantra.com/2013/05/equities-unlimited-upside-with-limited.html

      The above article was written in May.

      However, in July I wrote about how valuations were getting a bit stretched here:

      http://www.dividendmantra.com/2013/07/caution-warranted.html

      These aren’t contradicting articles. I’m in a unique situation where my asset accumulation phase in life is rather short (12 years or so), and I have to reconcile that with the fact that we don’t invest in a vacuum. The market is rather organic in nature and fluctuates wildly. Valuations change. That doesn’t mean I want to stop buying stocks, but rather I’m espousing to be mindful of where certain equities are priced relative to the market, and also where the broader market is valued at relative to historical valuations.

      Furthermore, I talk about looking at specific values as referenced in my quote from the above article:

      “But there’s always a value or two that an enterprising investor can focus on, if one looks hard enough.”

      Put another way, you may love steak. And at $5 per pound for a certain cut you’re a buyer. You’ll buy as much as the freezer will allow. However, at $10/pound you’re not buying anymore. That doesn’t mean you don’t still love steak. It simply means you’re not willing to pay a premium for the same cut of meat.

      Regarding your specific comments, I really don’t understand what you’re talking about.

      “June 26 – “if O can get back down to that $40 level, I’d be highly interested in adding.” Guess what? O hit $39.86 today. Now you agree with Buffett that value is tough to find? lol”

      I added to my position in O just earlier this month, well below $40 per share. I honestly don’t know what point you’re trying to make.

      You mentioned XOM numerous times in your comment. You must not have read the article. In the article I state:

      “I also think Exxon Mobil Corporation (XOM) and Wal-Mart Stores, Inc. (WMT) offer reasonable value. “

      I specifically mention XOM as being one of the values that the enterprising investor might want to take a look at. Furthermore, XOM isn’t quite the “steal” it was a few months ago. 2Q 2013 earnings were down over $9 billion compared to 2Q 2012.

      You state: “How much did your “valuation” of XOM change on a single quarterly earnings report?”

      Hmm, I’d say $9 billion might change things just a bit. I’m not saying I wouldn’t buy XOM today, but just that I’m not quite as enamored with it as I was a few months ago. When I was talking about XOM it was trading for a TTM P/E somewhere around 9.5. Now it’s almost 11.

      I’ll conclude by saying if you have the energy to go around digging through my blog for supposed “contradictory” comments (when they’re clearly not), you might be best served using that precious energy looking at other blogs and websites that align better with your viewpoints. Life is short, after all.

      Best regards.

    • Anonymous says

      I’m perfectly aware how much the YOY quarterly earnings of XOM changed. I can’t help but note that you did not answer my question though – how much, in your estimation did that single quarterly number change your “valuation”?

      My point is – if you are finding deals (like O, etc), why are you also talking about building up cash due to not finding values? The building cash seems inconsistent to me, versus all your previous comments about looking at individual securities, not worrying about the market in general, etc.

      O is only 1.4% of your portfolio. Even if that were the ONLY thing you could find, why not buy more of it? In many of your comments you’ve talked about “too many stocks/ideas” and not enough cash… but here you are with many stocks below the prices when you made those comments and you are choosing the cash over the stocks.

      Seems inconsistent to me.

      And the articles you posted are a distraction. I would never suggest those contradict one another.
      As for steak, your $5 vs $10 seems like another distraction… doesn’t seem applicable to any of the companies I mentioned versus 3 months ago….unless you think O, GE, BP, or XOM’s value dropped in half in the last 3 months? Because their prices certainly didn’t double.

    • says

      Anonymous,

      “O is only 1.4% of your portfolio.” Again, incorrect. You seem to be talking about inconsistencies, and yet don’t seem to grasp basic math.

      O is actually about 2.2% of my portfolio. I guess you’re too busy rooting for contradictory comments and not actually paying attention to my articles.

      Furthermore, I decided to dig up a comment of my own. This was a comment on my last “Recent Buy” article that highlighted my O purchase:

      “As far as REITs go, I’m really glad you’ve found value in some of my ideas. I obviously believe in these companies because I put my money where my mouth is. However, I don’t want to have much more than maybe 5-7% exposure to REITs.”

      I’m currently in that range when you add in DLR and ARCP (my other two REITs). That’s why I’m not buying more. Perhaps you recommend to ignore diversification simply because something is trading at a price you consider attractive?

      This will be my last response to you. This blog keeps me way too busy to focus in on one comment thread like this. Perhaps you can start your own blog where you spend your time pointing out non-existent inconsistencies. It might make for an entertaining read. At least then you could actually get some credit for making all of your thoughts and decisions public knowledge instead of hiding behind an anonymous moniker, which is much easier to do.

      Best regards.

    • Anonymous says

      Anonymous II here!

      To Anonymous,

      1. It’s very convenient to remain Anonymous and splice D. Mantra’s views.

      2. DM has said often about limiting his REIT exposure to about 5 %. In addition, to O, he is invested in ARCP and DLR.

      3. DM also has plans for the cash, plans which he expressed on this blog in an incredibly articulate way.

      I hope the above 3 points help.

    • says

      Anonymous II,

      Thanks for adding that. I appreciate your support and thoughts. I also pointed out the exposure to REITs being about as high as I’d like it to be right now. Otherwise, I’d buy more. As my portfolio grows I’ll add more REITs.

      Good point on the use of cash. I do have to use some of my cash for the purchase of a car, however my viewpoints on the lack of a lot of value in the market currently are irrespective of my transportation necessities. It did work out well though that an expensive market coincides with my need to deploy some of my cash elsewhere. :)

      One final point is that actually the above comments are quite timely as I did sell some of one of my positions today and purchased shares in an oil major with the proceeds. So I guess I’m not a hypocrite after all! I’ll be talking about the recent changes to the portfolio over the next few days. While I’m not a big fan of putting a lot of new capital to work right now unless the value is clear, I thought now was a good time to scale back on one company that I felt uncomfortable with and buy shares in what I thought was an undervalued company.

      Best wishes!

    • Anonymous says

      It’s interesting what points you chose to focus on, and which you chose to ignore. It would be much faster to say “I think XOM is now only worth $XX”. Must note that you have typed so, so much and still not a simple comment on XOM’s new “valuation”.

      You are assigning maliciousness to my quoting you for some reason. It really is simple – your bullishness in June (when I first started reading) was memorable because it was so far off my own thoughts at the time. That stuck in my memory. It’s only now after hearing the Buffett comments, you agreeing with him and talking about building up cash that I thought “huh?”. So, rather than falsely accuse you of anything, I questioned my own memory & went back and checked what I thought I remembered. I didn’t remember the specifics, and was open to the possibility that the stuff you were buying then wasn’t as cheap now. I read several posts from June (the Recent Buys & Watch List posts). As I came across a name (GE, XOM, O, BP, etc.) I checked to see if it had gone up. I was surprised to see they hadn’t. Hence I mentioned them, and asked you about them. Rather than be overgeneralized, I just copy/pasted the comments as I was reading them. I even considered that you might have a full allocation, so I checked your portfolio to try to rule out that possibility.

      I apologize for being wrong on the 1.4% versus 2.2% of your portfolio. I pulled the number directly from your portfolio which I see now is out of date (only updated monthly… one day before your second O purchase). My bad. I am fine admitting an honest mistake.

      I also like diversification. Setting a max limit for REITS is fine (still doesn’t explain choosing cash over GE, XOM, BP, or other non-REITS though).

      Even that explanation (“5-7% range in REITS) doesn’t quite add up. If O = 2.2%, ARCP = 1.1%, DLR = 2% (from your portfolio page), that = 5.3%. Still room to buy more and keep it under the 7%.

      Again though, you failed to address the overall main point… (choosing to focus on the one error I made.. nice!) There are many other stocks, such as XOM, GE, BP, etc that you declared cheap at higher prices less than 3 months ago.

      It’s seems you are avoiding the basic question.

      Rather than answer the main question, you start attacking me. That’s fine, but it’s also fine that I point out any inconsistencies I see.

      I’m not hiding behind anything. I don’t have any of those other posting “options”, so I chose the Anonymous. I’m not sure why you’d attack my choosing an option you offer/provide. I’d be happy to email or call you directly if I thought it would matter. Your responses so far make me think that would be unproductive though. Also worth noting that the other 5-10 times I’ve commented on your blog (Anonymously by the way), you responded and didn’t accuse me of “hiding behind an anonymous moniker”… maybe you liked those comments better.

      Bottom line – if those individual securities were so cheap in June… what changed? Besides Buffett making a comment on CNBC.

    • says

      Anonymous,

      I’ll humor you.

      “Bottom line – if those individual securities were so cheap in June… what changed?”

      I never said in my above article that select individual securities weren’t attractively valued relative to the market. In fact, I make a point of mentioning a couple times quite the opposite. The article was simply a reflection on the current market conditions which we now find ourselves dealing with. The S&P 500 is up over 8% from the end of June to Sept 18th. XOM posted a $9 billion loss YOY. Those are material changes in both the market and individual securities. As far as GE goes, I could have mentioned it as a possibility in the article, but this article was general commentary on the overall market’s valuation pushing many stocks within it upwards and into valuations that may make them unattractive to purchase right now. I included a couple names that I thought could be reasonable purchases, although like I said above XOM is certainly less attractive than it was a few months ago.

      Furthermore, I talked about this same topic (an expensive market and many stocks within it) back in July. This isn’t new. The stock market gyrates constantly. If it tanks by 15% tomorrow I’ll be talking about everything I want to buy. If it goes up by 10% from here I’ll be expressing caution even more. I love stocks because there is no other asset class that offers these types of returns over the long haul, but that doesn’t mean that I can’t express concern over valuations.

      I actually sold part of one of my bigger positions today and used the proceeds to purchase shares in an oil major, so while I find it difficult to put “new money” to work right now, pruning positions that are overvalued or perhaps too large based on individual strategies may make sense right now. I’ll be talking about that over the next few days.

      “I’m not hiding behind anything. I don’t have any of those other posting “options”.” – Actually, not true. You can post with a name, as many others do. Or, you can start a blog as I suggested. I don’t mind anonymous posters implicitly and actually quite welcome it, but when someone is trying to demonstrate that I’m a hypocrite I do take notice of their anonymity. It’s easy to criticize anonymously. I think anyone can agree on that.

      I appreciate readership from everyone, but if I were you I would probably head elsewhere. Simply put, if I’m reading a blog and the author comes across to me as a hypocrite then I’m not going to visit their site any longer. That’s me being frank, not rude.

      Best of luck to you!

      Take care.

    • Anonymous says

      Thanks for the reply. I re-read my original post, and want to apologize if it came off as attacking. I’m open to the possibility that it put you on the defensive from the start.

      “I never said in my above article that select individual securities weren’t attractively valued relative to the market. In fact, I make a point of mentioning a couple times quite the opposite.”

      Actions speak louder than words. Isn’t building up cash over buying anything implicity saying exactly that?

      Thanks for your advice on where to “head”, though unnecessary. This is the first post I noticed what appeared to be a major inconsistency in your message (sorry, not into name calling like hypocrite). I posted the comment, which would give you an opportunity to clarify or set me straight. Can’t say I’ve been impressed with your reply, and attacks. I will certainly give some thought as to how much more time to spend here.

      To be clear, anything I post I stand behind. Whether posting “anonymously” or not. I have no idea what info a blogger receives about me, so I type as if I was speaking directly face to face. To try to discredit my message due to being “anonymous” is ridiculous in this case. I did not consider the “Name/URL” a choice since I don’t have a URL and it wasn’t clear it was an either/or choice. Sounds like that might have been mistake #2 for me.

      Since we’re making suggestions, maybe you should look within and consider why my simple point/question struck such a nerve with you. Maybe you should also review Munger’s teachings on confirmation bias… it might partly explain why you reacted the way you did and why you suggest I spend my “precious energy looking at other blogs and websites that align better with your viewpoints”.

      Mike Hayes
      “Anonymous”
      Cincinnati, OH

    • says

      Anonymous,

      Returns during a certain time frame are not a proxy for valuation. The S&P 500 has not done well over the last decade or so because it was highly overvalued coming off the dot-com bubble. Furthermore, it depends on the time frame you’re looking at. When you look at it with a 4-year lens, the market has more than doubled.

      Take care!

  20. says

    I understand not wanting to devote more money than you are comfortable with to any particular asset, like you not wanting bigger positions in PM, KMI, or REITs. I have caught myself feeling the same way about AGU, HNZ, SU, and REITs. And the opinion is common to almost every investor whose opinion I read.

    My question is this, as I have thought long and hard about it and can’t see any reason why I haven’t heard about it from someone else.

    If REITs are cheap right now, as I believe they are, but you don’t want to devote more asset allocation to them than 5%, why can’t you just “stock up” on them now while they are “on sale”, temporarily raising their allocation but then not buy them while you build up the rest of your portfolio? If you have REITs at 5% now, when you have enough passive income to retire, your portfolio will be roughly 10 times larger. Therefore if you never bought REITs again they would be severely underweighted. So buy enough O or whatever other one you like that it meets your long term allocation, then go about doing the same for each sector or company as they become attractively valued.

    Thoughts? It makes sense to me, especially if you are looking at a long term investing horizon.

    • says

      Poor Student,

      Excellent question!

      What you’re talking about – temporarily increasing exposure to a company, or companies – is really all about personal circumstances and risk assumptions. It also has a lot to do with your personality and temperament.

      I have actually done this in my own portfolio. PM and AFL are prime examples. I never intended for them to be such large positions, but I kept on buying shares when I thought they were cheap (which I was correct about). They are now both larger positions then I’d like them to be, but they are slowly being reduced in weighting every single month as the rest of my portfolio grows in around them. However, this brings me to another point. The strategy of growing the rest of your portfolio around overweight positions takes time. Even for someone like me who’s buying thousands of dollars worth of equities every month it takes a while. So, it’s not easy to just buy up a ton of one or two issues and then just buy around them. Every dollar you spend on one security is a dollar you’re not spending somewhere else. Remember that.

      This strategy also takes a lot of confidence in a company and/or sector. As well, it takes a lot of confidence in your ability to value a company. What if you load up on a company and you were wrong, and it falls further? Do you just keep buying and buying and buying? What if you end up with 40% of your portfolio in one equity at that point? That’s the problem. I like buying a good value, but even then I don’t like to put all of my eggs in one basket.

      Regarding REITs, I don’t think they are crazily cheap to where I’d just want to overweight all of them. I think DLR in particular is cheap, but even then how do I know I’m completely correct in my investment thesis? How do I know the growth of data centers will grow as I predict absolutely, without doubt? I don’t. There is always doubt. Diversification is your hedge against this doubt.

      I hope that helps.

      Best regards.

Join The Discussion!