The market is more and more expensive every day.
Here's a strategic move I've made. Well, it looked strategic to me, but in a few months, I'll be able to see if it's been really strategic or just a useless move.
I've sold a "class C" free cash flow stock to buy two "class A" free cash flow stocks. These two stocks had better ROE and a similar or a little higher forward PE ratio, plus a better growth. However, these two stocks have a forward PE ratio lower than their historical PE ratio for the last 5 years. So, they're cheap on a relative basis while Stella Jones is expensive on a relative basis (about 26 times current earnings and 21-22 times next year's earnings).
The market is riskier than it's been. I don't want to sell everything and everybody who's got a brain says it's not a good idea to sell a good business because the market is expensive. But I want the best quality, because the best quality does better than the rest in a recession or in a period of growth.
I still think Stella Jones is a good business. It's better than 80% of what is avalaible on the market. But I've just thought that my Stella Jones position could be splitted in two smaller positions of higher quality stocks.
In other words, the stock market is expensive on a relative basis. Many stocks are expensive on a relative basis. But there's some expensive stocks (PE between 20 and 30) that have always been expensive and which are less expensive right now than they've been in the past.
It's probably better to buy stocks that have always been expensive than stocks that have rarely been this expensive.
Obviously, you could come up with a great example to invalidate my post.
Please take note that I'm probably not thinking about the stock you think about.
Have you bought DOL stock at 138$ this morning?
RépondreSupprimerHe was also praising Facebook lately. I wish I knew what his two new class A free cash flow stocks were. Maybe he likes Google / Alphabet Inc. I don't remember the last time it was under 25x next year earnings. He must be saving his newest picks for his PAID SUBSCRIBERS. ;-)
SupprimerGood idea. Just sold SJ myself and bought more Visa.
RépondreSupprimerNot sure selling SJ makes much sense given their track record and the fact the stock has basically gone nowhere over the past 12+ months. These types of core ROE stocks shouldn't be bought or sold. They should be bought and held until the fundamentals deteriorate past a point we're comfortable with or they become technically broken. SJ is neither at this point. In fact, I would suggest they are forming a very nice tea cup and handle chart pattern which is generally bullish. My 2 cents.
RépondreSupprimerTea cup and handle pattern????
SupprimerLOL. Some questions you will regret getting answered. The answer will feel like a seance or free psychic reading. Some look at tea leaves and some look at squiggly lines on a graph/chart to predict the future.
SupprimerI like rotating in and out of stocks. SJ to me is fairly valued at $55 and I am expecting some M&A shortly. I average 14.5% annual inside sheltered accounts over many years this way.
RépondreSupprimerWhen the stars align and the North Star is due magnetic north sometimes stocks form a pattern that resembles a tea cup and handle. Do NOT under any circumstance look at it without protective eyewear on as it can burn the retina.
RépondreSupprimerBut ya... tea cup and handle. Look it up; I don’t want to sound any more ridiculous than I already do...
Psychology plays such a huge role in everything we do and all the more so in investing. I made a decision, years ago to err on the side of inactivity. I thought that the less decisions I allow myself to make while investing the better off I will be….and yes I’ve been hurt by holding onto some stocks too long but then again I’ve benefited from holding some of my positions for years. I think everyone has to make that decision for themselves taking into account your individual bias and emotional makeup. There are no perfect answers in this imperfect world.
RépondreSupprimerIt’s human nature to justify to the outside world your individual point of view. But if metaphysics and quantum mechanics has taught us anything, the outside world we observe it just a reflection of what goes on inside of each of us.
…or maybe I’m just full of shit, you have to consider all the possibilities and in the end make a decision for yourself.
Well sometimes you have to listen to your instinct and be ready to shoot when an opportunity to buy happens. Sometime you have to go dig on your credit line to make such a fast move
SupprimerI d like to hear your thought on using leverage in investing
Not sure who you’re asking but I’m a big fan of using leverage when investing. If the ROE of a company is greater than your cost of capital, one should make maximum use of leverage... to the extent of their comfort level and ability to service the debt.
RépondreSupprimerNow we are late cycle so I wouldn’t suggest piling on the debt now but in the next crash go for it.
Buy a basket of high ROE companies and have a firm timeline in mind. If you’re investing for 10 years (a reasonable amount of time) then stick to it and don’t freak out if in month 18 you’re down 25%. This is going to happen.
I speak of personal experience here... I use no leverage with client funds.
I would say the two most important factors in determining an effective leverage strategy are:
1) income
2) time horizon
You need income to service the debt and you need a buffer should rates rise. How stable and predictable is your income? If not stable or predictable do NOT use leverage.
How long is your timeline? If you want to use the funds in less than 5 years (ideally over 10) then do NOT use leverage. The biggest risk is loss or reduction of income and inability to focus on long term goals. This is compounded in a situation where asset prices are down and interest rates (cost to carry) rise. They go hand in hand so you ideally want to leverage into a situation where prices rise and rates drop. I would wait for next crash.
Well said.. I have been slowly digesting info on Interactive Broker. Have not really thought that through yet in terms of its numbers and impact on my financials but the low interest rate is quite enticing at the moment.
SupprimerDuring the next crash rates will be even lower and risk assets down too. That's the time to do it... when everyone is freaking out. Or leverage into Vancouver real estate... it's a can't lose proposition. Real estate never goes down. Ummmm, I'm joking. Mostly.
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