Is Exacting a Buy Price Important for Long Term Investing?

At regular time intervals, I like to discuss selective questions from readers of this blog. Many times, I discuss randomly with no particular theme. It is usually based on either intriguing questions or inquisitive questions or just that I like the question. Now that markets have zoomed higher relative to last year, most of these questions have slowly drifted towards buying price. I give priority to respond to all questions that come from regular readers of my blog. I make sure I give them my best response. Others, I may or may not, depending upon if I have time to get to them or whether they are good questions.

Today, I am reproducing below three emails that follow the theme of “what is the buy price”.

  • I am a regular follower of your blog and I happened to see your post on Aditya Birla Chemicals Ltd (ABCIL). But I missed to buy it at that moment (the price was around 83 if I remember). Can you kindly suggest if I can buy the same scrip at CMP of 97/- ? I am a long term investor and can hold this scrip for long term.
  • i am keeping watch on share price of asian paints… i want to buy this stock…..having solid return on investment as well as good dividend history..but when i start follwoing ..price moving up and….currently P/E ratio is around 28 which i feel very costly…what is your openion….is it good buy considering growth stock…..and ignoring high P/E ratio?

  • I shall be highly obliged if you could provide your valuable guidance with regards to AegisChem (Aegis Logistics). On your recommendation I started watching this company’s stock price movement (just on paper not real) during past 2 months. I find it interesting. In deep correction the share price of this company went down till 261 but recovered quiet well to 280. Then on different days from 275 to 289. Then from 285 to 314. Then 292 to 306. I assume from this movement that the stock has great strength at 275 level. Am I right, can you please give your valuable inputs on this.  I want to invest in this share. But before investing into it I shall be highly obliged if you shall guide me how much strong is this stock. If market corrects deeply in coming days then what kind of low levels can be seen in this stock.

Can you see the commonality in these questions? All of these are related to, “these stocks have run up in price”, “can I still buy it”, “i am a long time investor and can hold it for long”.

In one of my earlier post, I mentioned that we lack clear goals and focus too much on execution. We focus too much on working like an employee. In my view, these are classic examples of focus on execution and/or working like an employee. In these examples, too much focus is being given to exacting the buy price. Think for a moment.

  • Does it really matter to buy at 261 or 275? how different is that? If the company is piece of crap, then buying at a price of 261 (instead of 275) is not going to help you.

Same way, if an investor can hold the scrip for long term, how much difference does it make to buying at 97 (instead of 83)? What is long term? In today’s environment, long term seems to be less than five years. It takes longer than that for a company to show results on its strategy or results from its investments. So are we really giving management time to grow? In my view long term means more than 10 years i.e. at least two business or economic cycles. In such a time period, do we believe difference of 97 vs. 83 is going to make any difference?

  • If the company does not execute its long term plan, it wouldn’t matter even if we buy at 83. It is a matter of comfort and how much risk an individual is willing to take. To me, I was comfortable to buy share for this company at 83. Another investor would be comfortable to buy at 97, i.e. comfortable in relatively higher risk. In this case, we both lose, one losses relatively less amount.

  • Now, if the company does good, then the question becomes how does it affect our returns? In a company like ABCIL, the individual buying at 97 is willing to take relatively less return (with higher risk).  Buying at 83 only means that it gives more returns (with relatively less risk – if it goes to zero).

  • Which one is better to meet your goals?

Continuing this further, the question about buying at premium. Again, here we are focusing too much execution. What is missing here is putting these buy question in the context of your goals, in the context of your own objectives. Asian Paints (Asian Paints Analysis) is no doubt a good company and very well managed. But does it make sense for an individual in the context of their goals? Let us compare it with historical valuations.

  • It’s PE ratio has averaged 32 in last three years. But on 10 year basis, its PE ratio averaged 24.
  • Current price of AP is Rs 2366. EPS is Rs 80.74. This gives PE of approx. 29.
  • Assume, under worst case, Asian Paints grows at 10% y-o-y for next 5 years. It will have EPS of Rs 130 in five years.
  • Now, with PE of 32, the price would be Rs 4160. This gives total return of 75% in five years (4160-2366=1794) i.e. approx. 15% per year
  • And, with PE of 24, the price would be Rs 3120. This gives total return of 32% in five years (3120-2366=754) i.e. approx. 6.5% per year

Question should not be whether we can ignore high PE. Question should be, how does ignoring high PE affect my goals? Does these extreme possibilities fit into your goal? I do not know about others, but it does not fit into my goals. This is the managerial question. I believe it is high risk to believe Asian Paints will continue to command high premium of PE 32 for next few years. No company does with such consistency. I believe it will come down to its long term average of PE24 in future.

Let me point one more thing. This discussion was not in the context of timing the market. I do not know how to do that. Therefore, if you are attempting to time the market than it is a different story altogether.

I hope this discussion helps understand that it is not important to be precise, it is not important to attempt to calculate exact price for buying your shares. The most important aspect of building sustainable portfolio or getting sustainable returns is to put your analysis in the context of your goals. When you do that, you will realize few percentages here and there is not going to affect your long term returns.

What make sense is to look for two extremes of; your personal risk profile and your target goals. This will give you a range for buy price. In my case, I am always more than happy to take 12% to 18% returns in low risk scenarios with consistency and sustainability. My goals do not allow me to chase 20%+ returns with high risk.

Disclamier: The point of this post is not to pick on individuals who sent me these emails. My sole objective is to discuss the context of buy price. Is it important to worry about specific buy price? is it really necessary to be specific? I selected these emails because they were relevant to recent posts or articulated this theme properly. I appreciate your questions. When I respond to these emails, it keeps reminding me that I need to stay on course and not carried away.

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35 Responses to “Is Exacting a Buy Price Important for Long Term Investing?”

  1. Arunsg says:

    Tip guy,
    How is situation different in the below two cases?
    1. Waiting to buy Aditya Birla chemicals at 83 instead of current 97 – by reader
    2. Waiting to buy Clariant at 45% discount from current price – by Tip guy.

    Of course, one is the %age difference in the waiting / current price, but I am more interested in the principle of the thing!


    • TIP Guy says:

      Hello Arun,

      Great question. It is associated with few different aspects. I have a follow up post already in works. Will post it soon.

      Best Wishes,

  2. Mayank Gupta says:

    Hi Arun, I think you should avoid these stocks. You may look to buy stocks like City Union Bnak & in the mid cap space Yes Bank & large cap like TCS & HOPE FOR 20-25% cagr RETURNS in next 5 years

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