Developing patience is a skill I’ve been working on since I was a kid. It’s a skill that is critical when investing, especially with individual stocks. As I’ve documented in this blog, my impatience (and stupidity) has cost me dearly with past investments. In this article, patience refers to not chasing stocks that seem to have gotten too pricey.
I want to invest like NBA star Earl Monroe played basketball. Some things you just can’t rush. I’ve got a long list of stocks I want to buy but it’s possible it may take years to acquire some of them. I’ve also got to consider that some will always be out of reach.
“Just be patient. Let the game come to you. Don’t rush. Be quick, but don’t hurry.”
Earl Monroe, retired NBA basketball player
Large companies don’t usually grow earnings over 10% on a consistent basis. They may have spurts of big growth and then slow back down based on their innovation cycles. If you can get 5%-8% earnings growth in a large company that’s pretty good. The bottom line though is that companies with consistent earnings growth can get pricey at times.
And the point of all this is simple. The price you pay for a quality company is critical to long-term returns. It can mean the difference of having a portfolio of $500,000 or $1,500,000 … it’s really that important.
Even Premium Companies Have Limits
Some stocks demand higher premiums. If we accept that and know which companies demand these premiums, then you can decide when to buy them. These types of companies have good balance sheets, consistent earnings, and usually growing dividends. Johnson & Johnson, Coca-Cola, Proctor & Gamble, Pepsi, and Colgate Palmolive are great examples of these types of companies.
Let’s show an example with one of the most premium of companies, Coca-Cola. Buying Coca-Cola in 1998 (at 50x earnings) versus waiting until 2003 (when it was more reasonable) is significant to an investor. When a stock is too pricey (even one of your favorites), you must move on to other opportunities. For the patient investor, waiting to buy Coca-Cola in 2003 (versus 1998) was an important decision and likely built you greater wealth.
- 1998 to present with reinvested dividends = 4.90% avg. annual return
- 2003 to present with reinvested dividends = 8.50% avg. annual return
That 3.60% difference (8.50% – 4.90%) in annual returns can mean retiring at 55 versus 65 years old. Investing $250,000 for 25 years at 4.90% will provide $826,000. But getting an 8.50% annual return will provide $1,930,000. That 3.6% difference equals $1,100,000 more in retirement and determines when you can retire.
Building the discipline (and patience) to buy quality stocks at the right price is critical to building wealth. It can actually determine if you retire at 55 or 65 years old.
As much as I love Coca-Cola, I would never pay more than 25x earnings let alone 50x. Buying at extreme premium prices guarantees lower portfolio returns. Again, I love Coca-Cola but never at those prices. It’s like me buying a pint of Ben & Jerry’s Cheery Garcia (another love of mine) at $12 versus $5. It just doesn’t make sense regardless of my desire.
Build Positions In Your Stocks
Waiting to buy a stock at the perfect price will be leave you frustrated. It’s just not going to happen unless you get lucky. That’s why I purchase multiple positions, usually 2-4 depending on my available cash.
My 2019 stock purchases of Exxon Mobil are great examples of that philosophy. Of course, having money at the right times is important … you have to be ready when prices are down. I purchased 200 shares of Exxon Mobil in 2019 with 4 separate purchases:
- 3/04/19 = 50 shares @ $79.44
- 5/08/19 = 50 shares @ $76.98
- 6/07/19 = 50 shares @ $73.20
- 8/16/19 = 50 shares @ $67.93
So my average cost per share is $74.50 with my 2019 purchases. Was it perfect? No. But I’m building a position in one of the world’s premier energy companies and I’ll buy more in the future. I suppose it’s better than buying all 200 shares on 3/04/19 @ $79.44.
And let’s not forget that I’m reinvesting my dividends too. If the price goes lower then I’ll be buying more below my cost basis. My attitude? It’s all good because I’m a long-term, buy and hold investor. Getting a decent price is more important than trying to get the best price.
With Coca-Cola, I plan on buying 100-200 shares each year assuming I can get it at a reasonable price. Like I keep saying, pick your stocks and start building positions in them. Whether you buy 100 share blocks or 2 shares per month it just doesn’t matter. With no stock commissions at many brokerages now, it’s really easy to buy $100 or $500 per month of any stock – dollar cost averaging is very easy today.
Summary
2019 was the first year in building my taxable stock portfolio. And I must admit, I had an itchy trigger finger (at times) when it came to buying stocks. I was trying to be patient but it was hard … I wanted to get into the game. FOMO syndrome struck way too often. The Fear of Missing Out (FOMO) was ever present when I had idle cash. This is something I must overcome.
If a premium stock get’s within +/- 10% of my optimal buy price then it’s possible I’ll take a nibble with my first purchase. If conditions suggest that my buy lower price could be met then I’ll just wait (patience) for the stock to come to me. And when it does I’ll be investing like Earl Monroe played basketball.
Be patient and thanks for reading!
Mr. TLR