Over the weekend I found myself reading a thread on an investment forum I frequent (Financial Webring) where a number of members began discussing their views on How to determine a “Reasonable Price” for stocks.?
When I invest I tend to use a number of criteria when selecting a target price for a buy or sell as I’ve outlined in past posts. Determining price is a balance between the qualitative factors contributing to the operating environment of a business and its quantitative performance. The beauty of the markets is that at any given time there are individuals who believe a company is undervalued, fair valued and overvalued all at the same time. Those opinions make the market what it is and it’s our responsibility as investors to determine an opinion on an investment and invest accordingly.
When Charles first befriended me a number of years ago he would often give me an example when I struggled with determining a price for a company I wanted to own,
“Picking a price is like asking a hot girl to the prom; you can wait for the right moment but if you wait long enough someone else will take her and you’ll find yourself dancing solo to the last song of the night.”
I always think back to this analogy when my stubbornness takes over and I’m determined to stick to a target price only to miss out on an opportunity to own part of a great company.
Investors often hear the opinions of others or say themselves, “not at that price,” in a stubborn response to the current price of an investment. As a value investor myself I try my best to get the best possible discount to the intrinsic value of a company I can whenever I make a purchase. What I have to be conscious of is the realization that as a shareholder I am part owner of a business and begin participating in the operations, successes and profits of that company the day I buy my first share. A great company, one with enduring characteristics, sells services or products that have sustainable demand and may not be cheap on any basis for a number of years. As an investor I can choose to either participate directly in the financial success of that company or wait for an opportunity that might never come.
Investors need to be aware that everyone loves a deal, but price can be the ultimate barrier for making a smart long-term investment. A fellow member of the FWF (Taggart) made reference to the criticisms of Warren Buffett on frequent occasions. Buffett buys companies at a premium to what others view the current value of a company to be, but it’s the long-term value, earning power and competitive advantage those companies hold where the true value is rarely realized in the present.
Just as in life there are times as an investor when you sometimes get what you pay for and there’s often no replacement for quality.