Years of doing research, reading academic studies and working on portfolios (including mine) brought me to this set of rules that enables me to simplify my investing process. Principle 5 – Buy When You Have Money in Hand – At The Right Valuation One of the most debated questions among investors is definitely when is the right time to buy a stock. And as beauty is in the eye of the beholder, every investor has its own opinion. Let’s see what metrics you should use for your stock valuation and how to read into them!
Video
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Verbatim
00:00 Mike: Hey fellow investors. Mikey from Dividend Stocks Rocks. I hope you’re doing well today. Today we’re tackling a very important investing principle. This is investing principle number five. Today, we’re going to talk about valuation and when to invest your money. So my fifth investing principle is buy when you have money on hand and at the right valuation. So let’s start with the second part of that principle, valuation. From time to time, I have readers telling me, “Oh I think Mike that this company is over valued, over priced. You should wait before buying it.” Or the opposite, “Oh, this one looks like a real bargain.” And it’s funny, because valuation is really like beauty is in the eye of the beholder. So this means that you can take two financial expert on a specific stock and ask them what’s their idea of the stock value should be and they will come out with all those calculations, all those principles, and stats, and in the end, one will tell you it’s over priced by 25% and the other one will tell you it’s a real bargain at this price and you should buy it right away.
01:17 Mike: So how come two financial experts can come with two different valuation for the same company? It’s quite simple. It’s because nobody knows the future and our valuation is always based on assumptions. No matter which kind of valuation method you’re using, so you can use the Dividend Discount Model, you can use the Discounted Cash Flow Valuation, you can use the PE Valuation. There are plenty of metrics and ratios you can use to determine a value of a company, but all of them are based on your assumption of the future, so if you’re wrong by 1% somewhere, somehow the stock will either become a great bargain or incredibly overpriced with just a few modifications on your model.
02:11 Mike: I always like to look at what financial experts, like, professional portfolio managers and big investment firms, are saying about stocks just for fun. And then I come back a few years later to see if they were right or wrong, and it appeared that in most cases, and it’s not empiric research obviously, but about 70% of the time, even professional portfolio managers, those big guys on Wall Street paid millions of dollars, they have all the resources in the world, all the technology the data, they have all the brain party have dozen CFAs working for them writing down analysis. They can pick up the phone and call the CEO and ask them about their business and why the last quarter it did that way or what they do well.
03:00 Mike: And even then, most of the time, they’re wrong. And you know why? Because there are plenty of things that we cannot know about. Who’s gonna know what’s gonna happen with the Brexit for example, or when and how the commercial trade war between the USA and China will be settled. We don’t know that and we don’t know where the oil price will be in 2022. You might have an idea, but your guess is as good as mine. So because of all those reasons the valuation is not that important. And imagine that if those big guys on the Wall Street with all the data and all the resources cannot make it happen, I really wonder how you or myself, can do it at home with my computer and if you’re free a few hours of my time.
03:53 Mike: So at DSR, what we do is that we use valuation, but as a mean of comparison to other stocks in the same industry. So, we used two metrics basically. Two methodology, so we use the first one is the P/E Ratio. Very basic, very simple. What we do is we look at the past 10 years to see what happened, just like how the market usually valued that stock throughout time and trying to identify if there were bumps, either like a big jump or a big down, just to see what happened over there. So that’s the first thing. And then we will compare it to its peers in the same sector to see reason why one stock has a P/E Ratio of 18 and all the others are at 22. So this is one thing that we wanna know if it’s going well or not. Then we’re going to use the Dividend Discount Model with a two stepped level. So we’re going to use first dividend growth rate for the first 10 years, which is pretty close to what’s happening for the company right now and then we’re going to usually drop it a little bit, be a little more conservative for terminal dividend growth rate.
05:06 Mike: But even then that just gives us an idea of if this stocks sounds good or not at this price, but we’re not going to base our investment decision on that factor. Actually we’re going to base our investment decision on fact on principle number six, which will be coming next week. So instead of that, we decided that every time we have money to invest, we just do it. We have our buy list that is already prepared based on the metrics that we have seen in principle, one through four. And then we just watch them and when we have money, we just invest it. Back in 2017, I quit my day job as a private banker, and I received the committed value of my pension plan, which was slightly over $100,000.
05:54 Mike: So we’re at September 2017. The market is that it’s peaks like ever. Highest of all time. And then I receive $100,000. And now I have to make a decision. Like do I put that in a safety box and just wait? Or do I apply DSR principles and use my own tools that I’ve developed to help other investors, and start investing? And this is exactly what I did. And if you’re curious about the results, I post on a monthly basis, my income reports from that pension plan account, which is great because this account is a locked in RRSP. This means that I cannot put additional money.
06:34 Mike: So all growth is coming from either stock appreciation, or dividend payment, so there is no way of bending the rules, or just putting a lot of capital at the right time, and then showing great returns because of that. No, it’s just I put $108,000 in that account and now I just let it go. So you can head over to my blog, look at the monthly report, and see how it goes there. And then you’ll see that I have made so far, I’ve made the best decision of my life, which was taking all my money, using my tools and my investment strategy, and invest that money in the market.
07:11 Mike: So and I’m not saying like that, you should do it or you should not. What I’m saying is the best time to buy a stock was yesterday, the second best time is today, and the worst time is probably tomorrow, ’cause in the end, in the next five, 10, 15, 25 years down the road, those companies if you have selected them right they will grow in value, they will grow in dividend, and then you’ll be a happy investor.
07:40 Mike: So if you’re curious a little bit more about valuation, I’ve done a complete webinar on the topic so you can just look at the link is in the note. Head over to my blog. Look at my portfolio, see how every month I manage it and I get my dividend growing, and then have a better idea of how it is to invest at the highest point in the market. Interestingly enough, in 2018, we had a big drop. I didn’t feel anything. I finished the year at plus 5.5% on that year and I’ve made no adjustment. I just kept steady, just kept my holdings, and obviously after that return was coming from dividend payment. So until next week, take your money, look at your buy list, and invest, and then be happy. Cheers.
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