Our money is very precious to us. For most of us, the money we have is the result of the years of hard work we put in to earn it. Of course, it also logically follows that the money that most of us have available for investment came from saving over the years. However, the common thread in both statements is the years it took. So yes, our money is very precious. However, nothing on earth is more precious than time. We can lose our money, and possibly make it back. But once our time is spent, it is gone forever.
As it relates specifically to investing, time is not only precious, it is also very powerful. However, like almost any powerful thing, it can be a two-edged sword. Time can be most beneficial towards growing our portfolios, but if not utilized properly, it can also be devastating. There are two age-old investing concepts that directly speak about time. There is my favorite, time in the market, and my least favorite, market timing. Nevertheless, both of these investing concepts relate to the importance of time with regards to investing.
Time in the market is the prudent principle of allowing money to compound (grow) over extended periods of time. The more time you expose your investment to, the more time you afford the power of compounding to work to your advantage. On the other hand, time in an investment works best when the investment was prudently initiated in the first place. In other words, time is a powerful ally when investments are made prudently. Of course, here I am referring to purchasing investments at sound or attractive valuations. When this is done correctly, time becomes the best and most powerful ally that an investor has at their disposal.
In contrast, if the initial investment is imprudently made, then time can become a very powerful and devastating adversary. Of course, here I’m referring to overpaying for even the best companies. When you pay too much, time will compound your losses just as it compounds your gains when investments are prudently purchased. This is where my least favorite investing concept – market timing – comes into play.
Value investing is often confused with market timing, which is why it is my least favorite concept. Market timing is the strategy of trying to guess or predict where the price of the stock will go, typically over the short run. Market timing implies active investing or trading. Market timers rarely hold on to a position over a long period of time. In contrast, value investors are attempting to determine the intrinsic or fair value of the business they are investing in. Most value investors endeavor to hold the stock, or more precisely, own the business for a very long time. So instead of trying to guess where the price might go in the short run, value investors are endeavoring to identify good businesses that the marketplace is either valuing correctly, or undervaluing.
Therefore, as it relates to the title of this article, value investors are looking for attractively valued investment opportunities that are worthy of the time and effort for conducting a comprehensive research and due diligence effort. To put this into perspective, as a value investor, no matter how much I admire a business or its management, I will not waste my time trying to learn about the intricacies of the business if the market is pricing it at significantly overvalued levels.
Instead, I will continue to look for a business that I do admire that can be purchased at a sound or attractive valuation. The rationale behind this approach is quite logical. If I purchase an excellent company at a sound valuation, then time is on my side. I may not get immediate gratification in the form of a short-term price advance. However, I can be reasonably confident that I will generate a return commensurate with the future operating results of the business in the long run. Moreover, the longer I hold the position, the more likely I am to succeed or meet my goals and objectives.
Time In The Market
Time in the market is a cliché; however, there is a mathematical foundation behind it. As a value investor, I recognize that when I buy a stock, I’m investing in the underlying business’ earnings power. In other words, I am buying earnings today that I hope will be greater in the long-term future. Therefore, I believe a key to long-term success is to purchase today’s earnings at a reasonable or fair price. I believe this both enhances future return potential and simultaneously reduces risk. Allow me to explain with a simple mathematical exercise.
If I purchase $1 worth of a company’s earnings where earnings are growing at 9%, by applying the Rule of 72, I understand that it will take approximately 9 years for the business to grow that $1 worth of earnings to $2 worth of earnings. To put that into words, it takes time for earnings to build (9 years in my example) to a level that doubles the value of the business. Therefore, in order to double my investment, I must come to grips with the reality that it is going to take time for that to happen.
Consequently, in order to mitigate my risk, I must be careful regarding the amount of money I am willing to pay to purchase that $1 worth of earnings. Under my personal investment discipline, this implies paying a P/E ratio of 15 (or less) which calculates to a 6.67% earnings yield. From a risk perspective, this means that 9 years from now if my $1 worth of earnings does in fact grow to $2 worth of earnings, the future P/E ratio could fall to 7.5 (P/E ratio 7.5 times $2 equals $15) and I would still break even. Moreover, any P/E ratio over 7.5 and I would be generating a profit. Of course, at a 15 P/E ratio I would be doubling my money in year number 9 as expected.
Accordingly, I also recognize and understand that it is more important to monitor the company’s earnings as each quarter unfolds than it is to monitor the stock price. Stock prices will constantly fluctuate, but if earnings are growing – the value of the business is increasing in concert. This supports my contention that fundamentals are more important than short-term price volatility. Nevertheless, at the end of the day, the more future earnings that my company delivers over time, the better my chance of making an acceptable profit. This is why time in the market is so important, but also why reasonable forecasting the future growth potential is vital. Forecasting future growth requires a comprehensive and continuous research and due diligence effort.
Are These 7 Stocks Worthy Of Spending The Time To Research Thoroughly?
The following portfolio review lists six high profile businesses (stocks) that I have long admired. Each of these six businesses represent quintessential examples of what I look for as a long-term oriented value investor. In each case their historical operating performance has been consistent and arguably exceptional. Importantly, each has also shown operating strength and resilience during recessionary periods. In short, they all characterize businesses that I would be comfortable owning over long periods of time.
On the other hand, due to their wonderful operating histories, they are rarely available for purchase at attractive valuations. Nevertheless, I have owned each of these six great businesses at one time or another over the years. However, excessive overvaluation after my original purchase has caused me to sell some of these positions in order to reduce the risk of my portfolio. Sometimes those have been great decisions, and other times they caused me to sell too soon. But, since all of these transactions have been profitable, I really can’t complain.
The following portfolio review also lists a seventh selection representing one of the hottest stocks in the marketplace today. This seventh selection, Nvidia (NVDA), offers a real conundrum regarding current valuation in respect to significant growth potential. This example offers many opportunities for value investing enlightenment. And quite interestingly, it underscores the principle that price is what you pay, and value is what you get.
With the following F.A.S.T. Graphs™ video analysis, I will take a close look at these seven companies based on important fundamental attributes in order to assess whether they are research worthy or not.
Source: F.A.S.T. Graphs Video
Summary and Conclusions
I believe it is important for investors to invest in companies that they admire and understand. However, I also believe it’s important for investors to have a clear idea based on fundamental analysis of what future return each investment is likely capable of producing. In order to accomplish this, valuation must be taken into consideration and comprehensive research and due diligence conducted. However, since comprehensive research requires time and effort, I don’t believe it makes sense to make that commitment unless the company is research worthy. In order to be research worthy, it must be a great business, and I contend it must be available at a reasonable valuation. Otherwise, it makes more sense to me to either look elsewhere, or wait until valuation is reasonable. The moral of the story is – don’t fall in love with the company without recognizing its potential and current valuation.
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Disclosure: I am/we are long GIS,JNJ.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.