I was thinking of something the CEO at my last job used to say all the time and how it relates to dividend investing. We would book revenue as soon as a particular event happened and then spread that revenue out over 12 months. His point was to hit this event to book revenue as soon as you can because you can never get that month back.
That got me thinking about investing. I am sitting on some cash and waiting for the right opportunity to come along. Is it better to just plow cash into reasonably priced companies and start earning the dividends or wait for the right price to come along? In my "always have to get a great price" ways, I tend to wait. But then I wonder if I am splitting hairs and missing out on dividends while I wait for a price that may never come?
It almost seems like you would want to avoid wildly overpriced stocks and purchase reasonably and undervalued shares as soon as you have the money to do so. This way, you are not missing out on dividend payments and the "reearnings" can begin to compound for a longer period of time.
Or perhaps I am splitting hairs here...I guess it depends on how long one would wait for their ideal price...
Dividend Investing and Opportunity Cost
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jacob
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It's called opportunity cost.
All it comes down to is whether the net present value (corrected for risk) of waiting is higher than the NPV of going in now. There are lots of fudge factors there.
Something I've noticed is that lots more money is made by buying at the right time than slowly accumulating streams of income at the wrong time. I've also noticed that I have a really hard time sitting on cash. My compromise is to buy boring companies (low beta) when risk is high and buy exciting companies (high beta) when there's blood in the streets.
Another thing I find helpful is to look at the yearly high/low prices for several years back and see how wide the range really is. This provides the fortitude to wait for a good price. Of course I wouldn't get in on something like AAPL with this strategy, but I do get companies like WM and WFC at lower prices than I otherwise would have. All it takes is some missed earnings; the stock dips for a day or two; and I get it 5%+ cheaper which is a year's worth of dividends.
All it comes down to is whether the net present value (corrected for risk) of waiting is higher than the NPV of going in now. There are lots of fudge factors there.
Something I've noticed is that lots more money is made by buying at the right time than slowly accumulating streams of income at the wrong time. I've also noticed that I have a really hard time sitting on cash. My compromise is to buy boring companies (low beta) when risk is high and buy exciting companies (high beta) when there's blood in the streets.
Another thing I find helpful is to look at the yearly high/low prices for several years back and see how wide the range really is. This provides the fortitude to wait for a good price. Of course I wouldn't get in on something like AAPL with this strategy, but I do get companies like WM and WFC at lower prices than I otherwise would have. All it takes is some missed earnings; the stock dips for a day or two; and I get it 5%+ cheaper which is a year's worth of dividends.
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DividendGuy
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I like to be invested, almost fully at most times. Sitting on cash waiting for the “perfect” time to buy stocks makes no sense as you are sitting on an asset guaranteed to lose value. Besides, there is no perfect time to buy stocks and if it did come how would you know it? (The market just dropped 1000 points…it’s a great time to buy…oh wait, it may drop another 400 tomorrow, I’ll just sit on my cash and wait.)
Benjamin Graham wrote a little about this in his seminal work "The Intelligent Investor". I don't recall his exact quote, but I do believe he favored towards purchasing stocks at an attractive price to start picking up the income and potential gains, instead of waiting for a price that may never come.
Either way, good luck!
Benjamin Graham wrote a little about this in his seminal work "The Intelligent Investor". I don't recall his exact quote, but I do believe he favored towards purchasing stocks at an attractive price to start picking up the income and potential gains, instead of waiting for a price that may never come.
Either way, good luck!
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jacob
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@DividendGuy - What Graham refers to is working into and out of positions. Suppose he has determined the attractive price to be $50. He would then start buying increments when the price dropped below $50 and keep doing this until the price went back over $50. Compare to determining a best price at $35 and waiting to buy the whole position at $35---that time may never arrive.
A sell price is similarly determined at which point one starts working out of the position.
OF course in order to do this one MUST have a model for what constitutes a attractive price. Without such a model, following this strategy makes no sense.
A sell price is similarly determined at which point one starts working out of the position.
OF course in order to do this one MUST have a model for what constitutes a attractive price. Without such a model, following this strategy makes no sense.
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DividendGuy
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@jacob,
Benjamin refers to profiting from both timing and pricing. Timing would include trying to profit from (perceived) upward investor sentiment or downward investor sentiment. You would then sell when you think the market is going to dive and buy when you think it's driving upward.
With pricing, you try to take advantage of what you're talking about-intrinsic value and the possible arbitrage of such. If a security is trading below what you determine the intrinsic value to be (DCF analysis or other) then you would buy when it's trading at a margin of safety to such and then sell when it's trading at a fair margin above.
Benjamin does, however, expound upon long-term holdings of stock and not just trading in and out. This goes further than above and to quote:
"By pricing we mean the endeavor to buy stocks
when they are quoted below their fair value and to sell them when they rise above such value. A less ambitious form of pricing is the simple effort to make sure that when you buy you do not pay too much for your stocks. This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as such it represents an essential minimum of attention to market levels."
And..
"We are convinced that the intelligent investor can derive satisfactory results from pricing of either type. We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator’s financial results. This distinction may seem rather tenuous to the layman, and it is not commonly accepted on Wall Street. As a matter of business practice, or perhaps of thoroughgoing conviction, the stock brokers and the investment services seem wedded to the principle that both investors and speculators in common stocks should devote careful attention to market forecasts."
And what I feel most appropriate in regards to buy now or later:
There is one aspect of the “timing” philosophy which seems to
have escaped everyone’s notice. Timing is of great psychological
importance to the speculator because he wants to make his profit in a hurry. The idea of waiting a year before his stock moves up is repugnant to him. But a waiting period, as such, is of no consequence to the investor. What advantage is there to him in having his money uninvested until he receives some (presumably) trustworthy signal that the time has come to buy? He enjoys an advantage only if by waiting he succeeds in buying later at a sufficiently lower price to offset his loss of dividend income. What this means is that timing is of no real value to the investor unless it coincides with pricing—that is, unless it enables him to repurchase his shares at substantially under his previous selling price."
I think that sums it up--Graham is basically saying that waiting on cash is of no real value to a long-term investor unless, of course, you can receive a price to compensate for the lost returns. Since you cannot know this with certainty, it would be most prudent to simply make sure you're not paying too much for your stock and to receive an adequate margin of safety. This of course applies to long-term investors, and not trading in and out as you were discussing.
Benjamin refers to profiting from both timing and pricing. Timing would include trying to profit from (perceived) upward investor sentiment or downward investor sentiment. You would then sell when you think the market is going to dive and buy when you think it's driving upward.
With pricing, you try to take advantage of what you're talking about-intrinsic value and the possible arbitrage of such. If a security is trading below what you determine the intrinsic value to be (DCF analysis or other) then you would buy when it's trading at a margin of safety to such and then sell when it's trading at a fair margin above.
Benjamin does, however, expound upon long-term holdings of stock and not just trading in and out. This goes further than above and to quote:
"By pricing we mean the endeavor to buy stocks
when they are quoted below their fair value and to sell them when they rise above such value. A less ambitious form of pricing is the simple effort to make sure that when you buy you do not pay too much for your stocks. This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as such it represents an essential minimum of attention to market levels."
And..
"We are convinced that the intelligent investor can derive satisfactory results from pricing of either type. We are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculator’s financial results. This distinction may seem rather tenuous to the layman, and it is not commonly accepted on Wall Street. As a matter of business practice, or perhaps of thoroughgoing conviction, the stock brokers and the investment services seem wedded to the principle that both investors and speculators in common stocks should devote careful attention to market forecasts."
And what I feel most appropriate in regards to buy now or later:
There is one aspect of the “timing” philosophy which seems to
have escaped everyone’s notice. Timing is of great psychological
importance to the speculator because he wants to make his profit in a hurry. The idea of waiting a year before his stock moves up is repugnant to him. But a waiting period, as such, is of no consequence to the investor. What advantage is there to him in having his money uninvested until he receives some (presumably) trustworthy signal that the time has come to buy? He enjoys an advantage only if by waiting he succeeds in buying later at a sufficiently lower price to offset his loss of dividend income. What this means is that timing is of no real value to the investor unless it coincides with pricing—that is, unless it enables him to repurchase his shares at substantially under his previous selling price."
I think that sums it up--Graham is basically saying that waiting on cash is of no real value to a long-term investor unless, of course, you can receive a price to compensate for the lost returns. Since you cannot know this with certainty, it would be most prudent to simply make sure you're not paying too much for your stock and to receive an adequate margin of safety. This of course applies to long-term investors, and not trading in and out as you were discussing.
@ jacob and dividend guy
I think your discussion is great, but you are ignoring the first rule which is protect your principal, and you should also remember that its likely the OP is not a veteran investor, and what works for some won't work for others - be it because they cannot devise an investment strategy or do not have the psychological makeup to undertake it successfully. If there is one thing that will permanently ruin your investments its losing the capital base ... so
@ OP read Ben Graham's The Intelligent Investor, understand the difference between investing and speculating (per Graham) and if you do not have the fortitude to invest in stocks, find a money market account or CoD that will provide you with a near certainty of keeping your principal ( within FDIC limits, since US banks fail about once a week) and provide you with a modest return - the value of sleeping well at night cannot be overstated
I think your discussion is great, but you are ignoring the first rule which is protect your principal, and you should also remember that its likely the OP is not a veteran investor, and what works for some won't work for others - be it because they cannot devise an investment strategy or do not have the psychological makeup to undertake it successfully. If there is one thing that will permanently ruin your investments its losing the capital base ... so
@ OP read Ben Graham's The Intelligent Investor, understand the difference between investing and speculating (per Graham) and if you do not have the fortitude to invest in stocks, find a money market account or CoD that will provide you with a near certainty of keeping your principal ( within FDIC limits, since US banks fail about once a week) and provide you with a modest return - the value of sleeping well at night cannot be overstated
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OurLifeInc.
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Thanks GP, while I wouldn't say I am a "veteran" investor, I have invested through two recessions now and have lived to tell about it...while also retaining most of my capital (outside of FITB...terrible investment...).
My question was derived from my thought process of looking at my watchlist and seeing a lot of companies that I would love to own either at high prices or reasonable prices. My original thought is to wait for a price I like. Which is when I got to thinking...is it better to just invest in something I would like to own and start collecting the checks (provided the price is not obscene) or wait for the really great price and forego the dividends.
My question was derived from my thought process of looking at my watchlist and seeing a lot of companies that I would love to own either at high prices or reasonable prices. My original thought is to wait for a price I like. Which is when I got to thinking...is it better to just invest in something I would like to own and start collecting the checks (provided the price is not obscene) or wait for the really great price and forego the dividends.
My personal feeling on the matter is to sort of combine waiting and buying. I nibble every once and a while, but try to have a little cash on hand. Then, when a wonderful opportunity comes along, I can get in on it, like Walgreens recently at 30 a share.
Generally speaking I will abstain from posting too much about dividends in this forum in deference to ERE philosophy (which I greatly respect), which Jacob has made clear does not require very much more than a pile of money whose growth can modestly exceed inflation. That makes absolutely perfect sense.
I am into the whole dividend growth investing thing, myself. So I can wax on it all day.
I mean there are factors, how much cash are you talking about? What is the ratio to what is already invested? Etc, etc.
Now the market is pretty high, I am expecting to see better prices for JNJ, PEP, etc etc. in the future.
Whereas MCD, we may never see the 70s. The CEO mentioned last year that there will be a new MCD store in China opened every day for the next three years. So as Jacob posted up thread, there is a lot of fudge room. I bought some recently at 87.
To me, each stock has its own personality. You keep an eye on them for a couple of years, and you can start to see how they behave. Then, you pounce if it's a good deal.
I am also personally a little bit less picky if the yield that I lock in is at around 3.5%-3.6%. But I still like getting good deals.
EDIT: Wow, I didn't answer a major component of your question: No, I don't view holding off a purchase for a couple of quarters as opportunity cost. You lock in a better yield by buying at a good price...In the long run that will make more money, my research has shown (I Happen to be 31 years old and will allow myself some years for asset accumulation- your choices may be different if you are thinking of retiring in the next year or two).
But I very much respect my friend Dividend Guy upthread for allocating his cash, as that provides a discipline and good, holistic philosophy to the investing...As they say, there are many ways to make a profit in the market...The main thing is to stick with one way and do it. Mainly a personality thing, I'd reckon.
EDIT2: Also, if you don't have time to look at price fluctuations on a daily basis during market open, my method will not work. I start working 4 hours after market open which gives me time.
Generally speaking I will abstain from posting too much about dividends in this forum in deference to ERE philosophy (which I greatly respect), which Jacob has made clear does not require very much more than a pile of money whose growth can modestly exceed inflation. That makes absolutely perfect sense.
I am into the whole dividend growth investing thing, myself. So I can wax on it all day.
I mean there are factors, how much cash are you talking about? What is the ratio to what is already invested? Etc, etc.
Now the market is pretty high, I am expecting to see better prices for JNJ, PEP, etc etc. in the future.
Whereas MCD, we may never see the 70s. The CEO mentioned last year that there will be a new MCD store in China opened every day for the next three years. So as Jacob posted up thread, there is a lot of fudge room. I bought some recently at 87.
To me, each stock has its own personality. You keep an eye on them for a couple of years, and you can start to see how they behave. Then, you pounce if it's a good deal.
I am also personally a little bit less picky if the yield that I lock in is at around 3.5%-3.6%. But I still like getting good deals.
EDIT: Wow, I didn't answer a major component of your question: No, I don't view holding off a purchase for a couple of quarters as opportunity cost. You lock in a better yield by buying at a good price...In the long run that will make more money, my research has shown (I Happen to be 31 years old and will allow myself some years for asset accumulation- your choices may be different if you are thinking of retiring in the next year or two).
But I very much respect my friend Dividend Guy upthread for allocating his cash, as that provides a discipline and good, holistic philosophy to the investing...As they say, there are many ways to make a profit in the market...The main thing is to stick with one way and do it. Mainly a personality thing, I'd reckon.
EDIT2: Also, if you don't have time to look at price fluctuations on a daily basis during market open, my method will not work. I start working 4 hours after market open which gives me time.
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jacob
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I guess it depends on "nerves" (which totally doesn't answer the OP question).
Personally I'd like to get to the point where I have the nerves to sit on a lot of cash and wait on "blood in the streets". However, I still feel that "cash is wasting money", but rationally "cash is power to act". There's definitely a permanent advantage to not being fully invested for the reason that most other people need to be.
For example, market makers (in equity) will operate like this, selling as markets are rising and having money to buy as markets are declining. I'd like to get to this point. (It would require not only FI but a substantial reserve beyond FI to commit to this.)
Personally I'd like to get to the point where I have the nerves to sit on a lot of cash and wait on "blood in the streets". However, I still feel that "cash is wasting money", but rationally "cash is power to act". There's definitely a permanent advantage to not being fully invested for the reason that most other people need to be.
For example, market makers (in equity) will operate like this, selling as markets are rising and having money to buy as markets are declining. I'd like to get to this point. (It would require not only FI but a substantial reserve beyond FI to commit to this.)
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secretwealth
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"Personally I'd like to get to the point where I have the nerves to sit on a lot of cash and wait on "blood in the streets"."
Yeah--I did this back in April. I'm not a happy camper.
Wasn't it Graham who first said that no investor can expect to know when to buy into the market?
Also, I think there will probably be an early warning of blood in the streets that allow you to cash out in time--there were warnings in 2008, although I doubt anyone expected it to go as low as it did. I can only imagine what it must be like to get ~10% yield on KC, T, PM, VZ...
Yeah--I did this back in April. I'm not a happy camper.
Wasn't it Graham who first said that no investor can expect to know when to buy into the market?
Also, I think there will probably be an early warning of blood in the streets that allow you to cash out in time--there were warnings in 2008, although I doubt anyone expected it to go as low as it did. I can only imagine what it must be like to get ~10% yield on KC, T, PM, VZ...
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jacob
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"I ask myself, ‘Why is it that several dozen people saw this crisis coming for years?’ I described it as being like watching a train wreck in very slow motion. It seemed so inevitable and so merciless, and yet the bosses of Merrill Lynch and Citi and even [U.S. Treasury Secretary] Hank Paulson and [Fed Chairman Ben] Bernanke — none of them seemed to see it coming.
I have a theory that people who find themselves running major-league companies are real organization-management types who focus on what they are doing this quarter or this annual budget. They are somewhat impatient, and focused on the present. Seeing these things requires more people with a historical perspective who are more thoughtful and more right-brained — but we end up with an army of left-brained immediate doers.
So it’s more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it. And the three or four-dozen-odd characters screaming about it are always going to be ignored. . . .
So we kept putting organization people — people who can influence and persuade and cajole — into top jobs that once-in-a-blue-moon take great creativity and historical insight. But they don’t have those skills.” --- Jeremy Grantham (2008)
I have a theory that people who find themselves running major-league companies are real organization-management types who focus on what they are doing this quarter or this annual budget. They are somewhat impatient, and focused on the present. Seeing these things requires more people with a historical perspective who are more thoughtful and more right-brained — but we end up with an army of left-brained immediate doers.
So it’s more or less guaranteed that every time we get an outlying, obscure event that has never happened before in history, they are always going to miss it. And the three or four-dozen-odd characters screaming about it are always going to be ignored. . . .
So we kept putting organization people — people who can influence and persuade and cajole — into top jobs that once-in-a-blue-moon take great creativity and historical insight. But they don’t have those skills.” --- Jeremy Grantham (2008)
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jacob
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Selling puts (insofar you're not leveraging/keeping the cash in reserve in case you're called...or is that putted?) is the synthetic equivalent of writing covered calls. That's essentially turning half of the volatility (the upside moves) into received income (premium minus option time decay) in exchange for a downside risk.
This is mostly a flat market strategy to be entered when volatility is high (which it currently isn't) and declining (it can almost only go up from here).
This is mostly a flat market strategy to be entered when volatility is high (which it currently isn't) and declining (it can almost only go up from here).
@ everyone
Wow ... cool thread developing. Cash, equities, debt - they are all in the final calculation capital and they always have capital equivalents at every moment, i.e. if a bond sells for 10 USD now, and a stock sells for 5 USD, you can exchange a bond for 2 stocks (minus transaction costs, of course) ... this just goes to say (in a convoluted way, apologies) that there is always an opportunity cost - if you sit on cash, you forgo dividends / interest payments / capital appreciation but you also potentially avoid capital depreciation, so we each have to choose our own position
In the end, only the market makers make money in this zero sum game, and those who create real new wealth, but that's about as rare as new land ... although I'd love to hear your opinions on this one!
Wow ... cool thread developing. Cash, equities, debt - they are all in the final calculation capital and they always have capital equivalents at every moment, i.e. if a bond sells for 10 USD now, and a stock sells for 5 USD, you can exchange a bond for 2 stocks (minus transaction costs, of course) ... this just goes to say (in a convoluted way, apologies) that there is always an opportunity cost - if you sit on cash, you forgo dividends / interest payments / capital appreciation but you also potentially avoid capital depreciation, so we each have to choose our own position
In the end, only the market makers make money in this zero sum game, and those who create real new wealth, but that's about as rare as new land ... although I'd love to hear your opinions on this one!@Jacob:
I'm new to financing
Rather than two NPVs, couldn't you just calculate one NPV (eg investing immediately) while your r would be the opportunity cost (eg rate or return of waiting before investing). NPV > 0 then invest immediately.
Otherwise what r's would you even use. As you mentioned lots of fudge factors in such a calculation.
I'm new to financing
Rather than two NPVs, couldn't you just calculate one NPV (eg investing immediately) while your r would be the opportunity cost (eg rate or return of waiting before investing). NPV > 0 then invest immediately.
Otherwise what r's would you even use. As you mentioned lots of fudge factors in such a calculation.
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Obadobadope
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Timing the market is a strategic luxury that I can't afford until I'm FI for the exact reasons that you mentioned. The time that we will gain back when we reach FI is invaluable, and so to be constantly moving toward it is also invaluable. Attempting to time the market and wait for great bargains is going to increase the variance of the time until freedom.