With stock markets at or near all time “highs” it is worth reminding yourself about the importance of price and value of proposed investments. I think it was a certain Mr Buffet that once said…
“Price is what you pay, value is what you get“
Whether you believe the markets are currently due a fall or not, it is always crucial try and buy your investments at the right price. I don’t want to delve in to the dark art of security valuation in this post but instead take a look at how buying your investments at the right price can turbo charge your future returns.
Lets assume you’re looking to buy £5,000 worth of shares in UTMT PLC.
Due to market volatility, and depending on when you bought the shares you might have paid £50, £75, £100, £125 or £150 per share at some point over the last 2-3 years. Lets also assume UTMT PLC pays a steady dividend of £5 per year which you duly re-invest each year. The price you paid for your UTMT shares has a dramatic impact on future value of your UTMT portfolio:
Of course you need to take the above graph with huge pinches of salt because I’m making some pretty wild assumptions:
- Annual dividend payments remain constant at £5 per share over the 25 year period
- I only focus on income, completely ignoring any capital appreciation/depreciation that would occur in real life
- Inflation is zero (which turns out to be correct for the time being at least!)
That’s all very well but do defensive shares really swing around in price as much as UTMT PLC does? Well just look at how a couple of supposedly steady Eddie shares like Coca Cola and Unilever bounce around in ‘value’ over the space of a couple of years:
Looking at the KO chart above you can see that ‘high’ price of roughly $44.5 is roughly 20% higher than the ‘low’ of $37. That can make a big difference to long term investment returns. So we can see it makes sense not to overpay for companies in order to maximise your future returns.
But hang on a minute, 24 months really isn’t long (or shouldn’t be) in investing terms. Look what happens when you look at the 10 year price chart for KO…
That $44.5 is roughly 135% higher than the low of $19 back in 2009. Investing at times of low prices like these is a sure fire way to supercharge your future returns.
Of course the elephant in the room here is timing the market. Personally I’m of the belief that this is a pretty futile activity to try to participate in. Quite frankly I haven’t got a clue what the price is going to do 1 day, week, month, year from now so it makes perfect sense for me not to try to predict future prices.
Instead I focus purely on the current price and the value (or lack of) that it offers me. From there I can (try to) make an informed decision about if I invest or not.
As you can see by the KO and ULVR charts above the stock market is a schizophrenic. In order to try and benefit in the long run you must try to separate what you think a company is worth, from the price which is what the market thinks it is worth. If you’re an active investor then this is where you need to focus your attention.
This article isn’t telling you to go out and buy the shares with the highest current dividend yields. The current dividend yield of a share should tell you something about the probability for future dividends flows. Chasing yield is usually an activity that ends in tears.
If you are going to overpay for a share then you’re generally a lot better off overpaying for a high quality company rather than a lesser one. Instead the point is to try and buy great companies when the market is pricing them with artificially high dividend yields.
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