Time In the Market Is What Matters Most: “Overpaying” For Quality Investments

by FI Fighter on April 30, 2015

in Real Estate Thoughts, Stock Investing Thoughts

time - 1

Almost every investor out there, novice or seasoned, will claim that they are a value-oriented investor; I am not one of those people. I don’t make investments with the objective of buying at bargain basement discounts and paying less than retail price. My main focus is on acquiring quality assets.

I also realized long ago that I’m really not that smart… and I’m even worse at trying to time the markets. So, I don’t try to. Of course, it’s preferable to buy when investments are on sale, as opposed to acquiring assets when they are setting all-time highs in value, but the most important thing that I’ve learned in my investing career is this: “Time in the market is far more important than trying to time the market.

These days, I’ve been making a lot of stock purchases as capital becomes available. Just earlier today, I picked up 100 shares of Starbucks (SBUX) at $49.99/share. “Value” investors might grimace at that transaction, because at first glance it’s readily apparent that I probably overpaid…

But as long as I’ve got a plan in place, and I’m executing it, I’m not at all worried about “overpaying”…

Make A Plan

When it comes to investments, even though I’ll never know when exactly the best time to buy might be, I try and know in advance what my plan for each underlying asset is.

In general, my preference is to invest in high quality assets and hold them for a long period of time. Ideally, I would like to be able to Buy and Hold Forever with each acquisition. But of course I’m more realistic than that, and do realize that life is always full of surprises and there may come a time when I will need to sell and change up my strategy…

Even so, I don’t always invest with the same intent and purpose with everything that I buy. In fact, my plan varies on a case-by-case basis:

  • Buy and Hold Forever
  • Short-term Side Hustle for Appreciation
  • Mid-term Side Hustle for Appreciation
  • Safe Haven Investment for Liquidation
  • High Yield Investment for Liquidation
  • Play Money Investment
  • Etc.

So, although I will put together an investment plan, I also know that I must stay fluid and agile as an investor because the markets are in a constant state of flux; I need to adapt accordingly.

2012: Bay Area Rental

Back in the summer of 2012, I made my first real estate purchase. At the time, the economy was still in the toilet and housing prices were ridiculously affordable (hard to believe today!). For every investment property that I ran cash flow numbers for, I saw a ton of projected cash flow.

Even though I had ZERO real estate investing experience, I felt like I had to make a move quickly because I didn’t want to miss out on these wonderful opportunities.

However, everywhere I looked, there didn’t seem to be much interest in buying up investment properties. None of my co-workers were doing it, and most of my family and friends were cautioning against buying rentals…

When I finally stumbled across Rental Property #1, something clicked for me. I loved the house and I thought that it would make for a wonderful long-term investment opportunity. The listing price was $250,000. I was willing to “overpay” $65,000, and ended up closing escrow at $315,000.

Everyone thought that I was nuts! “Why would you do such a crazy thing?!? Aren’t you analyzing what everyone else around you is doing? Aren’t you studying numbers, statistics, and sales comps?

What you are doing doesn’t make any sense“, I was constantly told. Seriously, who wants to be known as the guy who is raising the bar for appraisals because of his willingness to overpay?!?

My argument was that I’m a long-term investor with a time horizon far out into the distant future. I rationalized that I would rather “overpay” $5,000 or $10,000, or even $20,000 to lock-up a high quality asset TODAY, than to squabble over an insignificant amount of change that would resemble nothing more than a drop in the bucket many years down the road. I did not want to be penny wise and pound foolish and have nothing but regret TOMORROW.

I knew that this rental could become a strong anchor and a Buy and Hold Forever in my portfolio; it was located in a great community and had immense appeal to not only investors, but also homeowners. In my mind, this property was the perfect building block that would help me reach my goal of achieving early financial independence.

I was all in… and didn’t mind “overpaying”.

2013: Tesla Motors (TSLA)

In 2013, I ramped up production and acquired 3 additional rental properties. By the conclusion of 2013, I had acquired 4 rental properties total.

During the middle of the year, I made a plan to make a quick buck so that I could raise more downpayment money. Prior to Q2 earnings, I loaded up and purchased 260 shares of Tesla Motors (TSLA) for around $55/share.

This was my Short-term Side Hustle for Appreciation play.

Even back then, you had a ton of bears who were actively shorting TSLA stock. These skeptics would toss around figures all day long about how TSLA had no future, was about to go bankrupt, and couldn’t even generate a profit. From a fundamentals point-of-view, the stock was overpriced and a lousy investment.

Again, I chose not to listen… Yes, numbers are important, but there are so many other non-quantifiable features that one must consider as an investor before making a decision.

When I looked around me, all I saw was a ton of growth! The Model S, which I used to see once in a blue moon, was now something I was noticing on a regular basis out on the streets. Whenever I parked in the Santana Row parking garage, you would see a row of Model S vehicles being charged up. It was a thing of beauty to behold. The world was slowly changing and THE electric car had arrived.

At the time, it sure felt like I was “overpaying” to acquire shares of TSLA stock…

2014: Bay Area Side Hustles

The 49ers opened up their new stadium in 2014. Prior to the unveiling of Levi’s Stadium, I was actively hunting for a Mid-term Side Hustle for Appreciation play.

When I looked at properties on the MLS, I was shocked with how expensive the merchandise was. Prices had definitely climbed up briskly since I won my last Bay Area deal in 2013!

However, I was not to be deterred because I knew without a doubt that this particular area in the South Bay Area was going to be a rising star. Again, when I did my analysis, I threw all the numbers right out the window… Cash flow? Rental Property SH #1 is cash-flow NEGATIVE!

And I was perfectly OK with that… Because I saw not only a ton of growth potential, but I knew that this location was high-quality Class A and would EASILY help me secure the best tenants.

Again, when you have a plan and conviction in place, it’s easier to “overpay”. Not only did we “overpay” to win one property, we went about $30,000 over listing to lock-in Rental Property SH #2!

Long-term, these two moves might turn out to be my very best real estate deals…

2014: Alibaba Side Hustle

At this point, you might think that I’m making the concept of “overpaying” grossly simplified because I’m cherrypicking deals that panned out…

Well, for the next example, I’m going to use a deal that has NOT worked out — My decision to load up on Alibaba (BABA) shares towards the end of 2014.

To date, I have acquired 400 shares of BABA at a cost basis of around $95/share. The stock, as of today’s closing, is currently $81.29/share. Yes, that’s right, there’s a lot of RED in my stock portfolio, thanks to this one particular stock! 🙁

So, that’s some significant losses I’m experiencing right there! But just like with the transactions above, I’m not sweating the fact that I “overpaid”… BABA was a Play Money investment, with no end-date in sight; I knew what I was getting myself into. In other words, I didn’t put all my eggs into this one basket, and only invested capital that I was comfortable enough with losing… Each investment is unique, and you must consider your objectives, and assess your own risk tolerance before making any moves.

For now I’m holding. And I don’t have any regrets… I still see a lot of growth potential with this stock, and this side hustle was my gamble on the Chinese economy continuing it’s rapid growth into the future.

As mentioned above, I suck at trying to time the market. With BABA, I just wanted to purchase my ticket to the dance ahead of time, before they sold out at the door… Oops, I ended up overpaying… In the long-run, we’ll see if I indeed “overpaid”…

2015: Buy and Hold Forever Stocks

Earlier this year, I began in earnest to rebuild my dividend growth portfolio. Over the past few months, I’ve added some Buy and Hold Forever stocks such as: Johnson and Johnson (JNJ), Coca-Cola (KO), Chevron (CVX), Starbucks (SBUX), etc.

With these types of stocks, again: “Time in the market is far more important than trying to time the market.

So, I just picked up shares when I could… In the process, I probably did “overpay”. But because I have a defined plan and strategy in place for these holdings, that’s just fine with me…

Right now, it’s too early to tell, but over the next few years, I’m guessing my entry point into the Core Holding stocks mentioned above will look something like this:

9/20/12: Norfolk Southern (NSC): 40 shares purchased at $67.41/share

9/28/12: Norfolk Southern (NSC): 20 shares purchased at $63.70/share

10/24/12: Norfolk Southern (NSC): 40 shares purchased at $61.68/share

Back in fall of 2012, I dollar-cost-averaged (DCA) into NSC shares on 3 separate occasions as the stock sold-off. At the time, my entry point seemed like a big deal, as you can definitely see a HUGE delta between the purchase prices…

Fast forward to 2015, and NSC shares are now selling on the market for $100.85/share… So, it’s been about two and a half years, and you can CLEARLY see that the initial entry points become less and less meaningful as time passes… It didn’t really matter when I got in, and at what price I got in at ($61, $64, $67, $70, $75, etc.)… I don’t currently own any NSC shares today (I sold them off in 2013 to purchase Rental Property #2), but if I did, the ONLY thing that would have mattered was the fact that I got in at all!

For the third time now: “Time in the market is far more important than trying to time the market.

Even if you “overpay” for quality today, if you are indeed buying quality assets, then it will matter little what you paid for them many years later…

Summary

When it comes down to it, I’m an extremely simple investor; I guess that makes sense because I’m an extremely uncomplicated individual. Frankly, I’m just not sophisticated enough to run numbers all day long until I’m blue in the face to determine whether or not I should invest in an asset. Once I figure out what assets I want to own, I do the boring thing and I just buy them…

From time-to-time, I will take on side-hustles and look to make a quick buck. For the most part, however, I would say that I am a Buy and Hold Forever investor first and foremost. As such, I get to do even less work and become an even lazier investor…

I don’t need to study trend-lines, nor worry about whether the dollar is strong or not, nor care at all what analysts on Wall Street are saying… With enough time passing, all those “micro” details get swamped out by the “macro”, which I like to call the Big Picture.

Really, as an investor, my work and due diligence needs to be primarily focused on determining what assets are indeed high quality and worth purchasing in the first place; the entry point is not so important to me.

Don’t get me wrong, valuation definitely MATTERS, but it alone shouldn’t be the ‘end all’ for determining whether to invest or not. Quality and growth rates are extremely important criteria as well.

So, if in the process I end up “overpaying” for a property or stock that I really want to own, I’m not concerned at all.

Once upon a time I “overpaid” $65,000 for my first rental property. Last year I “overpaid” for two more Bay Area properties. Shoot, just this past January I “overpaid” for my third side hustle Bay Area property… But these days, everyone I talk to questions how I was able to score such massive discounts on such high quality rentals? Go figure. It must be because of that  “time in the market…” bit again.

Today, I “overpaid” for 100 shares of SBUX.

 

I told you, I’m bad with market timing… Just give me a few years and I’ll EVENTUALLY get it right. 🙂

 

Happy Investing!

{ 10 comments… read them below or add one }

1 Dividend MongrelNo Gravatar May 1, 2015 at 4:49 am

I wouldn’t worry about the $49 entry point for SBUX. In a week or two the price will probably be back up to the $50’s.

Reply

2 FI FighterNo Gravatar May 1, 2015 at 7:25 am

DM,

No worries here. I opened up a small position with SBUX and although it may look pricey now, I’m buying with a long-term perspective, so I’m more concerned with where the price will be in 10-15 years 😉

Cheers!

Reply

3 No More WafflesNo Gravatar May 1, 2015 at 4:54 am

Fi Fighter,

Great post! Even though everyone always says they’re a value investor, hardly any of them are. Getting a good deal on a high quality business or asset is great, but not mandatory. If I feel like the price is right, I’ll gladly pay for it, even if that means many “don’t buy anything over 20 P/E” folks would brand me a heretic.

In the long-run it doesn’t matter if you payed €20 or €21 for a good investment even though there’s a 5% price difference.

Cheers,
NMW

Reply

4 FI FighterNo Gravatar May 1, 2015 at 7:29 am

NMW,

Thanks! Yes, and that’s exactly my point — The term “value” is so subjective and not something that is always quantifiable. I believe investors sometimes put way too much emphasis on pure numbers and this can lead you astray to miss wonderful opportunities.

My purchase of SBUX is not an example of that, but this applies more to growth stocks in their beginning stages, and for real estate opportunities that fail the 1% Rule, or 50% Rule, or whatever other “rule” you want to come up with.

For instance, if I had prescribed to just following rules, I never would have bought any properties in the Bay Area because they would have always been “too expensive”.

Of course it’s great to be disciplined as an investor, but it’s also important to be open-minded and adaptable.

Yup, in the long run, provided you bought the right investment, a 5% price different today should be negligible in the long run.

Happy investing!

Reply

5 Dividend Growth InvestorNo Gravatar May 1, 2015 at 6:44 am

I am one of those investors who try to never pay more than 20 times earnings. Everyone can figure out which the “great” companies are. Few have the patience to identify a great company, and wait for it to sell at a reasonable price. If you overpay for future growth, your returns might be not as good as you expect.

This is because in a relentless bull market, investors tend to relax their valuation standards, and start chasing momentum plays. When you buy something above 20 times earnings, you are essentially fore-going the first 3 – 5 years of growth. This is because the long-term future growth of 12 – 15%/year in EPS is already baked in the price. If anything goes wrong along the way, the P/E will compress. Even if things go according to plan, you might not make a lot of money for a while. Would you hold on to Starbucks if the stock price is largely flat for the next 5 years?

Plus, you have opportunity cost to your capital. By buying something at 31 times forward earnings, you are foregoing the opportunity to buy something else that is cheaper and can compound money as well.

It is also possible I am way too careful. But, when you live through several stock price implosions, like the 2000 – 2003, and 2007 – 2009, you become more careful.

Reply

6 FI FighterNo Gravatar May 1, 2015 at 7:49 am

DGI,

I understand where you are coming from. Having discipline and being patient is absolutely necessary to succeed in investing, I’m not trying to imply that those things are not important. Further, I don’t mean to suggest that you SHOULD overpay blindly and just chase around momentum investments all day long.

With that said, I also don’t follow any hard and fast rules because you can always make an exception for an investment. The “never pay over 20 times earnings” rule is something a lot of investors follow wholeheartedly and I could never understand why.

In general, that rules applies more to large caps who are paying a dividend and transitioning more from a growth company to a dividend company… Even so, P/E tends to vary greatly from industry to industry. But sure, I will try and work that rule around stocks like: JNJ, KO, PEP, CVX, etc.

If you are trying to identify the “next big thing” it’s very likely that you’ll be paying a lot more than 20 times earnings… When I bought TSLA in 2013, there was no P/E, EPS was negative every quarter!

CMG is one stock that I regret never getting into, and that’s another example that has always failed these rules… Even today at $600+, it’s P/E is still too high…

I’m not saying those moves or “gambles” will always pan out; in many cases, they will not. And not every investor has the same desire to invest for hyper growth, but if you do, you have to break a rule every now and then.

With SBUX, I just believe that the company has what it takes to become a future dividend champion, or aristocrat. So, I would rather get in early before the dividend growth stagnates, the stock matures and stops rapidly growing, and then the P/E and fundamentals compress and fall into line with “good value”.

In regards to opportunity cost, you can initiate smaller positions, or simply nibble here and there to gain exposure without overcommitting yourself.

There are many ways to invest. I probably am too aggressive, but I tend to prefer growth, which is why I invest the way I do. But I also mix it up and stash cash and invest in more defensive holdings to compensate. I believe it’s possible to invest for both growth and stability.

Take care!

Reply

7 No Nonsense LandlordNo Gravatar May 1, 2015 at 6:45 am

The problem with individual stocks is getting out of them initiates a trading fee, and a taxable transaction. If they are headed down and out, or you need money, you have to sell. Sell a portion, and you owe multiple commissions.

Stick with ETFs, with $0 commission, and buy sectors or just the S&P. Swinging for the fences is easy. Making money while doing it is hard.

Odds are, you will not beat the rate of inflation, let alone the market. There have been studies that prove that same theory.

Reply

8 Roadmap2RetireNo Gravatar May 1, 2015 at 10:52 am

Excellent points, FIFighter. I agree that in the long run, a few bucks shouldnt matter as long as an investor is buying high quality companies.

Thanks for sharing and the writeup
R2R

Reply

9 LeighNo Gravatar May 1, 2015 at 8:30 pm

I’m with No Nonsense Landlord. I like buying index funds – it really calms my anxiety about the stock market, eliminates it really. No commission, no selling costs, just buy and hold for decades. I’m not much of a fan of swinging for the fences though and I really don’t believe that it’s possible to beat the market long-term. There are lots of high-quality companies in the Total US Stock Market index, including SBUX 😉

Reply

10 Kathy @ Rental RealitiesNo Gravatar May 5, 2015 at 1:42 pm

I think part of the problem is that some get analysis paralysis waiting for the verybestpossibledeal that they never do anything. Or they talk themselves out of an opportunity because somebody else somewhere has a better deal. Somebody somewhere will ALWAYS have a better deal.

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