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…..as 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.
ABCIL, Aegis Logistics, Asian Paints, buy price, fair value price, Fair Value Range, goals, strategy
Wow !! What a piece of insight!
I have been reading your blog for sometime now and find it very to the point and informative. Keep up your good work as novices like me who are trying to build up a long term(10+ yrs) portfolio get to learn a lot from you.
Regards
Raja
Raja,
Thanks. Good to know you enjoy reading my posts.
@ tip guy: Only one comment – This is a piece of GEM to be used as reference for new investors learning what investing really means.
Hello Raju,
Thanks.
But broad based timing when to buy/sell should work right? for example asian paints commands higher premium means one could buy at PE 29 and sell that at PE 32? it does have a likehood in short term like next 2 or 3 years (assuming your long term of 24 is true).
Hello Rajendraa,
I already mentioned, this post does not encompass market timing. I do not know how to do it.
Best Wishes,
what I meant by board based timing was more not tomorrow or next week or next month. something more like a swing or momentum in one year or two year time scale.
Again, I do know how to trade on swing or momentum. Not my cup of tea.
i am a stay home mom. in my family, i do long term investing and my husband does short term trading. he get 25% of investing capital. even thought we discuss all our buys and sells and which company to focus on. few months back we can a discussion on a stocks of one company and trend was to buy around rs 315. but i end up buying in rs 324. we can a good bit of argument becuase he was not happy that I paid rs 324, which was obviously more than 315 which we talked about. it was hard for me to explain him it does not matter in long term. i could not convince him there is nothing wrong in it. two weeks later the stock went to 335. And he said, look if you bought at 315, we could have sold it for 335 more higher profits. again i could not convince him that we never talked about short term in weeks, we talked about in years of holding.
Now i can take this article and ask him to read hopefully this will convince him. your arguments are right on the point. excellent job explaining the really meaning is very simple language with examples.
Thank You
Hello Shikha,
I appreciate you sharing your observation/experience. Funny situation you are in! Good luck in convincing your husband.
Best Wishes,
Sir, hats off to you
:-)
thanks
Superb tipguy,
I am so glad that yoy put all these question in a post together, Many of your readers will definately benifit from this, I had similar questions when i started reading your blog initially, however if one reads all your post carefully wont botrher about it. i understand that there would be many who would have joined recently and would not have read all your post and hence questions like this will keep comming to you.
One recomendation to all your readres who would like to read all your post can subscribe your blog feed in Google Reader and read all your post, its much easier to follow.
Thanks again for the wonderful post.
Vikrant,
Well, questions are always welcome from readers.
I only wish, like yourself, readers would spend time to understand the thought process and philosophy behind it. Probably its the short attention span we all are used to. I don’t blame them.
But it is indeed a good suggestion from you.
Best Wishes,
hmmm i am missing something, Where is spam protection question, did you remove the it, whats 4+11
Cheers!
I removed it temporarily to see if it affects spam comments. You see, I want to minimize the efforts for commenting by genuine readers (like yourself)
Well, this brings me to one question.
Say I bought a scrip at Rs.X. After 5yrs, the scrip rose to 3X.
As per my initial due diligence, I know company has good fundamentals, and would continue to grow.
How and when should I add to current position?
Since, I am following your blog for quite sometime now, I know you bought L&T for around Rs100. Though, it has grown to manifolds now. How did you decide to add to it? Doesnt it bring down the overall effective yield?
I ‘d appreciate if you could please enlighten us.
Regards
Yogesh Tiwari
Hello Yogesh,
Very good question. I have written a post about it (not posted yet because I need to add some examples). It is based on allocation, personal portfolio risk, and company prospects.
I did cover the sell side, but not the buy/add side yet. So please stay tuned, will post shortly.
Best Wishes,
What made you decide that you want to add? natural tendency would be to sell the winners, more so because you have huge returns. But you did not sell, but you bought more.
Thanks for the article, very nicely put down….
Hi Rana/TIP,
My understanding in this goes like this…
1. You do not need money urgently (why should we sell)?
2. The company is paying you enough dividends and the management is doing great (why should we sell?)
3. The company still grows (so the share price as well as the dividend grows) , why cant we buy if that is again attractively priced?
4. the YOC might go down in the short term after additional purchase… but again on long term does that affect?
5. If we dont want to spend much time finding out some company which does better than this/ if we cant find another one which suits our style.. why cant we stick with the proven friend?
6. The value range for each company that TIP publish will change every year (most probably.. even if that is not reflected in this web site.. his excel should be updating).. depending on how company performs… there could be scenario like a good company is beaten down for prolonged period of time… so additional buy is possible again….
Hi Tip Guy
Thanks indeed for an eyeopening Post.Iam sure this is one of your best Post.
Hello Chirag,
Thank you for good words, and I am glad you liked it.
Best Wishes,
Hello Tip Guy, excellent post!!
Can you tell me one thing? Where can one find the historical PE?
Thanks,
Priyank
Hello Priyank,
Thanks for your appreciation. I calculate historical PE myself. It is average price for that year divided by corresponding earnings.
Best Wishes,
Thanks for the reply, TipGuy.
indeed good thoughts on long term and few numbers here and there shouldn’t matter. I fully agree with you on this!
Also how to find historical PE?
Cheers
Marshal
Hello Marshal,
I calculate historical PE myself. It is average price for that year divided by corresponding earnings.
Best Wishes,
wow, pretty large number of comments. this shows people do read post closely and leave comments.
very well said, it of company is piece of crap, no price is going to keep your capital safe.
keep the GEMs rolling.
Warm Regards,
DS
welcome back! It seemed you took a short hiatus.
TipBlog:
I am a very long term investor>25 years. So it was interesting reading your article.
I have 2 questions:
- Buying at a higher price -agreed it does not make much of difference in the given examples…but is it a good idea to chase stocks for eg missed buying at 315…so do you chase and pick it up 400? What about Margin of Safety?
- An intriguing question – what about the selling price? When do we sell? At what price? I have been investing>25 years, have missed many highs to sell, but if I hold to a good company – the next is higher. But what if I need money – how do you plan on selling?
Would appreciate if we can get a response to the question.
Hello Ashok,
Buying at a higher price; I can’t advise/suggest what others or readers of this blog should do. In my case, it is subjective. Depending upon my allocation, portfolio needs, I could make decisions. For example (1) companies like ONGC, NTPC, Pidilite, Asian Paints, Hero Honda, etc., I could stretch and pay somewhat higher than my fair valuations. It could be 10% or 15%. I am open here. But probably not beyond that. Their history tells me they should deserve some premium. (2) For companies like ABCIL or Cheviot or Aegis etc., I would limit myself to my fair valuations. I would not stretch to pay any premium. I need more margin of safety in these types of companies.
On selling; I have discussed my thought process in a series of three articles. Please refer to Exit Plan/Strategy section in My Process
Best Wishes,
Hi Tip Guy,
I am a recent follower of your blog. There are a lot of good posts on your blog in regards to long term investing and I am glad that I was able to find this blog.
Some background on me.
I have been able to save a sizable amount, but most of it is in bank and company FDs, NSCs, KVPs, real estate, gold, and mutual funds.
I am new to investment in individual stocks and want to start doing my own research to identify potential companies to buy and hold.
My question to you is what websites/newspapers/magazines do you make use of when doing research on a prospective company.
Is there a process that you follow to calculate risk metrics for your individual situation?
If I am able to create a process, would you be able to comment on its usefulness and practicability?
Thanks,
SM