The following is an email from Andrew, a subscriber of DividendVault.com.
Below is a list of stocks that Andrew purchased and his purchase price:
Let’s rewind back the time to 2 November 2020, when I received the email.
At that time, the current stock price for the stocks listed are as follow:
Ideally, as investors, we like to build portfolios by accumulating stocks that have solid fundamentals when their prices are undervalued. Personally, I like to use 3 valuation ratios: P/E Ratio, P/B Ratio, and Dividend Yields to determine whether or not a good stock is undervalued, fairly valued or overvalued. These ratios are helpful as I can avoid overpaying for these stocks and would invest into them at reasonably undervalued prices.
With that being said, after buying these shares, I understand stock prices would either go up, come down or move sideways. It is normal and part and parcel for us as stock investors because we all could not control or predict the markets. As such, it means undervalued stocks could become even more undervalued, after having purchased them.
Therefore, it is important for us, as investors, to deal with this before investing.
Here, I’ll share mine from my own experience as an investor.
For me, I too have invested in good stocks and after I’d done so, their prices fell. As you can see, I’m not that superb in market timing, having the ability to really pinpoint with accuracy of when exactly stocks are trading at their lowest prices. I’m as human as you all.
But, the difference is this –
I know what I’m going to do if prices of these stocks had fallen. This is because I intend to accumulate them for eternity especially if they are cash-cows that are capable of generating higher dividends in the long-term. Hence, to put it simply here, I will be happy to buy more if the prices of my good stocks had fallen.
But understandably, as humans, it feels bad to see a dip in prices of your stocks, especially after you had purchased them. As Andrew explained, it could also be somewhat demotivating, affecting confidence in building wealth via investing in the stock market.
As such, I’ll like to share my reply to Andrew’s email with all of you.
Here is an extract (In Italic) of my email reply to Andrew:
For me, I see a stock like a property. The mentality is the same. If a property is offered below its market value and rents good, I like to buy. I can’t determine when exactly the property will appreciate in prices. But, I’ll be happy to hold onto it as long as I can rent it for income. Typically, if let’s say, an owner of a neighbouring unit wishes to sell his for a lower price than what I had paid for. For instance, if you buy yours at RM 500,000 and he wants to sell his at RM 450,000, the question is:
a. Will you quickly sell yours for RM 450,000?
b. Will you nego with the owner and try to buy over his at, maybe, RM 420,000-RM 430,000?
But, why does an owner sell a property for RM 450,000 or lesser knowing that it is worth RM 500,000 in market value?
As you know, the reasons can be plentiful. It could be one of the following:
a. Owner could be in financial difficulty or in need of cash due to funding a better investment, his kids’ college education / wedding / house purchase, or to fund his retirement lifestyle.
b. Property’s fundamentals had deteriorated. Higher crime rate. Lesser job opportunities. Migration of people from a small town to a bigger town or city … etc.
c. Changes in government policies, uncertain prospects, and just about anything that you can think of.
It’s the same with stocks.
There are many reasons why people buy and sell stocks in the stock market. As such, we can’t really predict with great accuracy on stock prices and doing that, to me, is like chasing the wind. That’s why I focus on the stock’s quality or fundamentals. What I personally want is a stock that can withstand and be profitable in bad times and good times.
Honestly speaking, if I invest in a stock, in a way, I hope that its stock price doesn’t go up quickly as I won’t be able to accumulate more of them over time if it rises up. Rather, in times like this, I like to see the stocks that I bought dip in stock prices as I intend to accumulate more. So, this time is not about harvesting. It is a time of sowing.
The above is a strategy workable for an investment, be it stocks or properties, that are fundamentally strong. If a person buys a stock that has poor fundamentals, it would never work with or without COVID-19.
I know it’s seductive to look at other people’s results. People who bought gloves had made 100+% in capital gains will obviously feel like they are geniuses in the stock market. I think it will be hard for them to invest for 5+% dividend yields because they are addicted to the fast & immediate gains in no time. But, the thing is:
a. Can they replicate their glorious successes again and again over the next 2, 3, 5 or 10 years?
b. Before this, how many people do we know that can always make 100-200% gains in 1 year with every single stock they purchase with superb accuracy?
c. How many of these people lost big time and are reluctant to share with us?
So for me, it’s important to keep the big picture of why we invest. For me, I like stuff which is more consistent and replicable. Dividend income, to me, is recurring and replicable. I’m not the best market timer and never plan to be one. I don’t know how to pinpoint the exact price point when the stock hits the lowest. But, with valuation ratios, I know how to buy a stock at prices that are relatively lower in comparison with most investors. So, in essence, if I buy a stock at RM 10 and the others boht it at RM 15, I would make greater dividend yields and capital gains if the stock price rises to RM 20 and I would make lower capital loss if the stock falls to RM 8.
But, will stocks go up over time?
The answer lies in their demand for them. I can’t guarantee that. Here is the thing. Shares of good businesses may be sold during bad times, especially if investors are in need of cash. But, during good times, when people have more money, would they want to invest in good businesses or bad businesses? If they buy good businesses, then, the market would reprice stocks of these good businesses, causing them to go up.
Shortly after our email exchanges, prices of Andrew’s stocks have risen and as a result, turning some of his capital losses into capital gains.
In 20 days, from having 5/5 stocks in capital losses, Andrew has capital gains for 3 out of 5 stocks that he invested. Does it mean that Andrew has turned from a lousy investor into a decent one in 20 days? Absolutely not. This just shows that stock prices in the short run are unpredictable. Instead of looking at it to invest, I find it better to just focus on business ownership. If your purchase price is low, then, in comparison to other investors, you should be:
a. Earning higher dividend yields
b. Enjoying higher capital appreciation (if stock prices go up)
c. Incurring lower capital losses (if stock prices come down)
Hopefully, from my email exchanges with Andrew, you had learnt something on stock investing. If you would like to find out my art of building a stock portfolio, you may check the free training below: