The Price you Pay
Look for safety in the price you pay
Marty Whitman
We've talked a lot about concentrating on the underlying value of a stock as opposed to its selling price. When the markets tank people are concerned about selling off their assets and fleeing for cover. Having said that, the price you pay for an asset is important. Why? Because it ties in closely with having a "Margin of Safety". https://nivag18.blogspot.ca/2016/04/normal-0-false-false-false_8.html
If you pay a low price for an asset you will be better equipped to shield yourself from the emotions of the market when it goes haywire and sells off. Because your original cost base is low you will be mentally and emotionally more secure with the asset you hold even if it goes down in price. This is an important psychological point. You can be a master at analyzing a company's fundamentals. A whiz at technical analysis and reading the charts of the companies you hold, but if you are not psychologically squared away, none of it will matter.
It pays to be a patient, disciplined investor, waiting to get the price you want for an asset. Think of a cat waiting in the bush for just the right moment to ponce on its prey. Now think of a dog who sees a squirrel. The dog will run blindly ahead with no hope of catching the squirrel. When it comes to investing in the stock market, act like a cat, not a dog.
Now nothing in life is straight forward and that applies to the stock market as well. If there is an exception to the above rule it might be the company that has great metrics and allocates their capital so efficiently that it never sells off much even when the market goes down. These companies (often referred to as quality growth companies) are rare but if the business is attractive enough you might want to pay up for it. This is especially true with companies whose management allocates their capital effectively. It takes good judgement to transverse these waters. Good judgement comes from experience which comes from bad judgement. So for most investors it will be a work in progress.
Good investing will always be more of an art form than a science no matter what the quants might say.
We've talked a lot about concentrating on the underlying value of a stock as opposed to its selling price. When the markets tank people are concerned about selling off their assets and fleeing for cover. Having said that, the price you pay for an asset is important. Why? Because it ties in closely with having a "Margin of Safety". https://nivag18.blogspot.ca/2016/04/normal-0-false-false-false_8.html
If you pay a low price for an asset you will be better equipped to shield yourself from the emotions of the market when it goes haywire and sells off. Because your original cost base is low you will be mentally and emotionally more secure with the asset you hold even if it goes down in price. This is an important psychological point. You can be a master at analyzing a company's fundamentals. A whiz at technical analysis and reading the charts of the companies you hold, but if you are not psychologically squared away, none of it will matter.
It pays to be a patient, disciplined investor, waiting to get the price you want for an asset. Think of a cat waiting in the bush for just the right moment to ponce on its prey. Now think of a dog who sees a squirrel. The dog will run blindly ahead with no hope of catching the squirrel. When it comes to investing in the stock market, act like a cat, not a dog.
Now nothing in life is straight forward and that applies to the stock market as well. If there is an exception to the above rule it might be the company that has great metrics and allocates their capital so efficiently that it never sells off much even when the market goes down. These companies (often referred to as quality growth companies) are rare but if the business is attractive enough you might want to pay up for it. This is especially true with companies whose management allocates their capital effectively. It takes good judgement to transverse these waters. Good judgement comes from experience which comes from bad judgement. So for most investors it will be a work in progress.
Good investing will always be more of an art form than a science no matter what the quants might say.
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