Waiting for "2009 Style" Values to Appear vs. "Great Companies at Good Prices"

[BargainValueHunter]

So I've been screening for companies with strong free cash flow growth and looking at their charts, these stocks have screamed higher for four straight years. First there was the snap back from the crisis lows, then nothing while Europe went through its crisis, then BOOM!!

 

With the exception of late 2008 and early 2009 very few of these companies screamed value on a price to tangible book value basis.

 

Although a lot of the values are stretched there are still a lot of companies that are trading at prices that aren't outrageous while growing free cash.

 

So my dilemma is...

 

Wait for a correction (that seems to never come) to scoop up some strong companies at great values or buy NOW and if a correction comes add shares as the price falls.

 

Buy now and collect dividends or wait while my cash earns next to nothing.

 

What would you do?

 

(My targets are mid-caps to mega-caps with strong brands and pricing power)

[merkhet]

I think that would depend on the answer to the following question.

 

Were you able to call the 2008/2009 meltdown?

 

If so, then you should wait. If not, what makes you think you can call/time the next one?

[augustabound]

I think that would depend on the answer to the following question.

 

Were you able to call the 2008/2009 meltdown?

 

If so, then you should wait. If not, what makes you think you can call/time the next one?

 

I don't think it's about calling a meltdown or bottom but waiting for cheaper values. He mentioned tangible book, so waiting for a valuation you're more comfortable with makes sense.

 

Wait for a correction (that seems to never come)...

A correction always comes sooner or later.

 

[Uccmal]

I have been buying now and collecting dividends.  In some cases I am no longer buying but holding so long as there is a reasonable and growing dividend.  I dont expect we are going to get a 2009 sale again for years, maybe decades.  As much as I regret anything, I am sorry I didn't just hold my shares of Sbux, Axp, Ge, HD, and a couple of others from 2009. 

 

I dont rule out a correction of 20-30% by any means.  I have protected against this by practicing some diversification.  Regarding dividends: Even in the death throes of 2008/2009 most companies didn't cut their dividends. Of those that cut most of them are running tighter these days to avoid repeating the experiment (i.e the big US banks). 

[giofranchi]

When I have some cash, I always buy businesses that I love. If you don’t do more business than you could afford to (if you don’t use leverage indiscriminately), I think that’s what I would suggest.

Of course I always try to understand which businesses might perform better in the future: when I see lots of complacency, and I believe a correction is probable, I gravitate towards those businesses that are more conservative, hold lots of cash, and have an history of taking good advantage of slowdowns.

 

Gio

 

[merkhet]

I don't think it's about calling a meltdown or bottom but waiting for cheaper values. He mentioned tangible book, so waiting for a valuation you're more comfortable with makes sense.

 

Maybe I was primed by the title, but it read like the OP was asking whether he should wait for a meltdown given that he was asking about "2009 style" values.

 

If the valuation doesn't make sense, don't buy it. There will always be a correction somewhere. (For instance, oil & gas over the last year or so.) If the valuation does make sense, buy it.

 

Perhaps I'm a bit touchy on the subject. I've met so many people (professionals and amateurs) who are all waiting for the next "market event" so that they can deploy their 100%/80%/50% cash. (One wonders why they think they will be able to allocate their capital this next time around when they weren't able to do so the last time around.)

 

It's not just generals that fight the last war.

[frommi]

I have been buying now and collecting dividends.  In some cases I am no longer buying but holding so long as there is a reasonable and growing dividend.  I dont expect we are going to get a 2009 sale again for years, maybe decades.  As much as I regret anything, I am sorry I didn't just hold my shares of Sbux, Axp, Ge, HD, and a couple of others from 2009. 

 

I dont rule out a correction of 20-30% by any means.  I have protected against this by practicing some diversification.  Regarding dividends: Even in the death throes of 2008/2009 most companies didn't cut their dividends. Of those that cut most of them are running tighter these days to avoid repeating the experiment (i.e the big US banks).

 

While i am fine with holding dividend growth stocks, those are the most expensive stocks on my watchlist because they are typically slow growers and most of them don`t really deserve PE`s>20. Can you tell us some tickers? I found the most value in some fast growing stocks that have the same P/E`s as some of the stalwarts. (for example PG or KO look very expensive, while GOOG or BRK.B look relative cheap)

[augustabound]

I've met so many people (professionals and amateurs) who are all waiting for the next "market event" so that they can deploy their 100%/80%/50% cash. (One wonders why they think they will be able to allocate their capital this next time around when they weren't able to do so the last time around.)

 

Hindsight bias at its best.

[BargainValueHunter]

I can see how my title is confusing.

 

I didn't mean "100% cash until the next Lehman event rolls around".

 

I suppose I meant holding a chunk of cash until we get a decent 10% to 20% correction in the S&P; 50% cash or so. Great answers so far!

[Uccmal]

I have been buying now and collecting dividends.  In some cases I am no longer buying but holding so long as there is a reasonable and growing dividend.  I dont expect we are going to get a 2009 sale again for years, maybe decades.  As much as I regret anything, I am sorry I didn't just hold my shares of Sbux, Axp, Ge, HD, and a couple of others from 2009. 

 

I dont rule out a correction of 20-30% by any means.  I have protected against this by practicing some diversification.  Regarding dividends: Even in the death throes of 2008/2009 most companies didn't cut their dividends. Of those that cut most of them are running tighter these days to avoid repeating the experiment (i.e the big US banks).

 

While i am fine with holding dividend growth stocks, those are the most expensive stocks on my watchlist because they are typically slow growers and most of them don`t really deserve PE`s>20. Can you tell us some tickers? I found the most value in some fast growing stocks that have the same P/E`s as some of the stalwarts. (for example PG or KO look very expensive, while GOOG or BRK.B look relative cheap)

 

Sure, I dont know how your taxes work but I have 4 from Canada:

Russell Metals - peripheral play on oil - but not totally reliant on oil. Rus.to

 

Mullen Group - non drilling oil services and trucking - Mtl.to

 

First National -FN - Canadian residential mortgage lender - largest non- bank - Sells to highest credit score group.  Closely held.  Happens to be my mortgage lender so I have some experience with their tight lending requirements

 

Royal Bank - RY - Canada's largest bank - not real cheap but well run.

 

Non Canada: Seaspan - SSW - have held for 6.5 years - largest holding - still growing and growing divdend.  See the SSw thread

 

JPM, WFC, AIG - all older holdings now. 

 

Cheers

 

 

[merkhet]

I can see how my title is confusing.

 

I didn't mean "100% cash until the next Lehman event rolls around".

 

I suppose I meant holding a chunk of cash until we get a decent 10% to 20% correction in the S&P; 50% cash or so. Great answers so far!

 

I don't want this to seem like I'm picking on you, so please don't take it that way.

 

From September 15, 2014 to October 15th, 2014, there was a roughly 7.5% correction in the S&P 500. Ask yourself honestly whether you were "almost ready" to deploy your 50% of cash. (Perhaps also ask yourself if you were able to time it, because timing here matters -- there will certainly be a 10% to 20% correction in the future, but we just don't know when.)

 

If you absolutely were almost ready to deploy your 50% of cash, then you should sit and wait in 50% cash. If you were not almost ready to deploy your 50% of cash, then ask yourself if you're always going to be waiting for the next bigger correction.

[Mephistopheles]

There is a member on this board, racemize, who did an in depth study of whether or not it's worth it to hold cash waiting for a downturn. The conclusion was that unless your portfolio is extremely volatile, it doesn't pay to wait. So if you find value, just buy it. Once in a while you'll buy just before a big dip; but over the long term you won't sacrifice opportunity for waiting around.

 

And the opportunity cost of missing out on gains in the long term outweighs the infrequent costs of missing bear market opportunities. This is because over the long term, stocks appreciate very well. Even in the event of a downturn, there is the question of how much further is there to go? Do you fully invest at -10% or wait for -20%?

 

Even Buffett said that if he had small sums he'd be fully invested.

[Mephistopheles]

To look at it with an example. The market moved up quickly after March '09, like 50% or more in one year. There were many people who felt they should wait for March prices...those people are either still waiting or threw in the towel at some point as the market kept rising and March '09 became a distant memory.

 

If the DJIA today would drop 33%, from 18,000 to 12,000, these same people I'm sure would be buying hand over fist. Yet I'm sure the same people refused to purchase when the market was at 8,000 after the '09 bounce back.

[kab60]

I've been thinking this over as well since I started out investing a year ago when markets were around their all time high (like today), but it seems futile to try and time a correction. Instead I try to set aside 70 percent of my pay each month so I invest the same each month (if I find opportunities). I'm just 29 years old, I don't 'need' the money, and my life wouldn't change if my portfolio dropped 75 percent, so if that happens, I can use my monthly cash infusion to buy companies at a bigger discount. Also, catching a big correction will probably be a valuable (but expensive) lesson and will teach med something about my own physchology.

[KCLarkin]

If you absolutely were almost ready to deploy your 50% of cash, then you should sit and wait in 50% cash. If you were not almost ready to deploy your 50% of cash, then ask yourself if you're always going to be waiting for the next bigger correction.

 

And if you were ready to deploy on a tiny correction, would you have been disciplined enough to NOT buy in early 2008?

 

Keynes answered OP's question several decades ago. If you could time the market better than Keynes, you wouldn't be asking.

[merkhet]

If you absolutely were almost ready to deploy your 50% of cash, then you should sit and wait in 50% cash. If you were not almost ready to deploy your 50% of cash, then ask yourself if you're always going to be waiting for the next bigger correction.

 

And if you were ready to deploy on a tiny correction, would you have been disciplined enough to NOT buy in early 2008?

 

Keynes answered your question several decades ago. If you could time the market better than Keynes, you wouldn't be asking.

 

Well, that's my answer too, but I was asking the question of the OP. :)

[Guest longinvestor]

If there is a market swoon as it is implied, it is likely to sink all boats together. Including the "great companies" you already own. If your names fall 10%, 20%, 30%, not buying those again is kind of silly. This is the bird that was in the bush that flew into your hands. In a market swoon, I highly suspect that many people somehow favor other birds in the bush! Many of Munger's classic human misjudgments are at work here.

 

How many times since 2009 have the Omaha boys bought more of WFC, DVA, IBM etc.? Some of these were the result of market swoons, other times it was one-time events. It doesn't matter, it should be far more easier to make those decisions. Most of the money (virtually all of it) I've made have been by buying more of what I already owned. This has lead to more concentration as well; #10/#15 positions made more room for #1, #2... I'm grateful that the last 10-15 years presented plenty of such opportunities. Heck, last week did!!

 

 

[tombgrt]

If there is a market swoon as it is implied, it is likely to sink all boats together. Including the "great companies" you already own. If your names fall 10%, 20%, 30%, not buying those again is kind of silly. This is the bird that was in the bush that flew into your hands. In a market swoon, I highly suspect that many people somehow favor other birds in the bush! Many of Munger's classic human misjudgments are at work here.

 

How many times since 2009 have the Omaha boys bought more of WFC, DVA, IBM etc.? Some of these were the result of market swoons, other times it was one-time events. It doesn't matter, it should be far more easier to make those decisions. Most of the money (virtually all of it) I've made have been by buying more of what I already owned. This has lead to more concentration as well; #10/#15 positions made more room for #1, #2... I'm grateful that the last 10-15 years presented plenty of such opportunities. Heck, last week did!!

 

 

 

This so much. The best remedy to having a fear of buying (or buying too early) is owning something already and averaging down when the stock drops on nothing but general stock market sentiments. Just make sure you don't buy more just to get a lower average price but because the opportunity got much better.

 

Instead of holding cash, hold the cheapest things you can find. Plenty of outperformance possible both when markets continue to go up as when they go down. It's the only sensible thing to do. I believe it's extremely unlikely that your entire possible investment universe is overpriced. If it is, look further away from home.

[BargainValueHunter]

I can see how my title is confusing.

 

I didn't mean "100% cash until the next Lehman event rolls around".

 

I suppose I meant holding a chunk of cash until we get a decent 10% to 20% correction in the S&P; 50% cash or so. Great answers so far!

 

I don't want this to seem like I'm picking on you, so please don't take it that way.

 

From September 15, 2014 to October 15th, 2014, there was a roughly 7.5% correction in the S&P 500. Ask yourself honestly whether you were "almost ready" to deploy your 50% of cash. (Perhaps also ask yourself if you were able to time it, because timing here matters -- there will certainly be a 10% to 20% correction in the future, but we just don't know when.)

 

If you absolutely were almost ready to deploy your 50% of cash, then you should sit and wait in 50% cash. If you were not almost ready to deploy your 50% of cash, then ask yourself if you're always going to be waiting for the next bigger correction.

I'm not looking to "time" a specific event. My question had more to do with buying great companies at fair value (today's situation IMHO) vs. waiting until those companies are trading at bargain valuations which may take many years.

[Tim Eriksen]

I can see how my title is confusing.

 

I didn't mean "100% cash until the next Lehman event rolls around".

 

I suppose I meant holding a chunk of cash until we get a decent 10% to 20% correction in the S&P; 50% cash or so. Great answers so far!

 

I don't want this to seem like I'm picking on you, so please don't take it that way.

 

From September 15, 2014 to October 15th, 2014, there was a roughly 7.5% correction in the S&P 500. Ask yourself honestly whether you were "almost ready" to deploy your 50% of cash. (Perhaps also ask yourself if you were able to time it, because timing here matters -- there will certainly be a 10% to 20% correction in the future, but we just don't know when.)

 

If you absolutely were almost ready to deploy your 50% of cash, then you should sit and wait in 50% cash. If you were not almost ready to deploy your 50% of cash, then ask yourself if you're always going to be waiting for the next bigger correction.

I'm not looking to "time" a specific event. My question had more to do with buying great companies at fair value (today's situation IMHO) vs. waiting until those companies are trading at bargain valuations which may take many years.

 

I am curious why you referenced price to tangible book value as a relevant valuation metric when looking at great companies.  Why do you use that metric?

[merkhet]

I'm not looking to "time" a specific event. My question had more to do with buying great companies at fair value (today's situation IMHO) vs. waiting until those companies are trading at bargain valuations which may take many years.

 

Right, so my response was that the important variable here, the timing (and therefore the opportunity cost), is either knowable or unknowable. If you (correctly) know the timing, then the answer is obvious. If you do not know the timing, the answer is probably also obvious. :)

 

I would hazard to say that most of us do not know the timing, so it's sort of pointless to wait around for it. If you find companies (and they might be rare) that are excellent companies that are run by fantastic capital allocators, then they will take care of your issue during a downturn. (i.e. - they will be acquiring other companies and/or repurchasing stock during the downturn) And that will accrue to you over the long term as a shareholder.

[BargainValueHunter]

I can see how my title is confusing.

 

I didn't mean "100% cash until the next Lehman event rolls around".

 

I suppose I meant holding a chunk of cash until we get a decent 10% to 20% correction in the S&P; 50% cash or so. Great answers so far!

 

I don't want this to seem like I'm picking on you, so please don't take it that way.

 

From September 15, 2014 to October 15th, 2014, there was a roughly 7.5% correction in the S&P 500. Ask yourself honestly whether you were "almost ready" to deploy your 50% of cash. (Perhaps also ask yourself if you were able to time it, because timing here matters -- there will certainly be a 10% to 20% correction in the future, but we just don't know when.)

 

If you absolutely were almost ready to deploy your 50% of cash, then you should sit and wait in 50% cash. If you were not almost ready to deploy your 50% of cash, then ask yourself if you're always going to be waiting for the next bigger correction.

I'm not looking to "time" a specific event. My question had more to do with buying great companies at fair value (today's situation IMHO) vs. waiting until those companies are trading at bargain valuations which may take many years.

 

I am curious why you referenced price to tangible book value as a relevant valuation metric when looking at great companies.  Why do you use that metric?

It's just one of many. I don't claim it to be superior or inferior to any other metric.

[Tim Eriksen]

 

I am curious why you referenced price to tangible book value as a relevant valuation metric when looking at great companies.  Why do you use that metric?

It's just one of many. I don't claim it to be superior or inferior to any other metric.

 

Okay.  I am probably making to big of a deal out of it.  It just struck me as a strange metric to mention since it seems irrelevant, and I think Buffett would agree.  Price to TBV makes sense under a net-net approach (where one is striving to pay less than 1x), but with a good business it is valuing the cash flow stream. 

Truly great businesses could function with minimal, and even, negative book value.

[writser]

I can see how my title is confusing.

 

I didn't mean "100% cash until the next Lehman event rolls around".

 

I suppose I meant holding a chunk of cash until we get a decent 10% to 20% correction in the S&P; 50% cash or so. Great answers so far!

 

A 10% correction means we would return to prices as they were 10 months ago. A 20% correction would mean returning to prices as they were 22 months ago. A 30% correction would mean returning to prices as they were 31 months ago. A 40% correction would mean returning to prices as they were 43 months ago. As Mephistoteles aptly pointed out: all the people waiting for 'corrections' probably end up paying more than if they invested their money right away. Most of them suffer from an anchoring bias. As far as I am concerned value is determined bottom-up, not top-down.

[BargainValueHunter]

I can see how my title is confusing.

 

I didn't mean "100% cash until the next Lehman event rolls around".

 

I suppose I meant holding a chunk of cash until we get a decent 10% to 20% correction in the S&P; 50% cash or so. Great answers so far!

 

A 10% correction means we would return to prices as they were 10 months ago. A 20% correction would mean returning to prices as they were 22 months ago. A 30% correction would mean returning to prices as they were 31 months ago. A 40% correction would mean returning to prices as they were 43 months ago. As Mephistoteles aptly pointed out: all the people waiting for 'corrections' probably end up paying more than if they invested their money right away. Most of them suffer from an anchoring bias. As far as I am concerned value is determined bottom-up, not top-down.

I understand but a lot of board members mention holding cash. Are there not too many superior companies trading at reasonable valuations at the moment?