Looking for stuff in our happy zone
So, you have found a stock you would really like to invest in. It seems a bit pricey but you figure you will be holding it for the long haul. What do you do? When is the right time to buy? And how do you avoid the sin of engaging in market timing? This dilemma is what I’m going to write about in this post.
Waiting for the right pitch
Waiting for the right pitch is a Buffett metaphor. To understand it, consider how he puts it.
Buffett wrote in his 1994 Chairman’s Letter to Berkshire Hathaway shareholders: “Ted Williams, in The Story of My Life, explains why: ‘My argument is, to be a good hitter, you’ve got to get a good ball to hit. It’s the first rule in the book. If I have to bite at stuff that is out of my happy zone, I’m not a .334 hitter. I might be only a .250 hitter.’ Charlie [Munger] and I agree and will try to wait for opportunities that are well within our own ‘happy zone.’” (Buffett W. E., The Essays of Warren Buffett: Lessons for Corporate America. 1998) p. 208
You have money to invest. Many investment ideas come to your attention. You think, ‘if I leave my money in cash too long I will be losing the chance to make a good return from it’. You decide to invest in a decent stock. It is not a superb company. That would be a mistake. Or you find a superb company that is pretty pricey. Those are what Buffett would call swinging at bad pitches. You have lowered your standards just to get your investment dollars invested. Waiting for the right pitch is waiting for a superb company at a bargain price.
Patience, the right pitch and more
This requires patience. Patience is needed to buy well. And while we are talking about patience, when a stock is bought at a bargain price, general sentiment around the stock is usually pretty negative. It may take a while for the sun to shine again. But, if the stock is well chosen, the sun will most likely return. That takes patience. And also, when a superb company has been added to the portfolio, the best holding period is forever, again as Buffett puts it. Holding through thick and thin requires patience. These are three examples of the need for patience in investing. There are others.
It’s an interesting question as to whether patience can be learned. Some people are by nature impatient and others just seem to have remarkable patience. I do think that everyone can learn to be more patient, especially if they understand the reason patience is called for.
Back to our first question
You have found a stock you would like to invest in. It seems pricey. Do you take a swing? The clear answer is no.
In my experience, liking a company or liking a stock and waiting for it to come into my price range is a serious waste of time. It may never come into my price range. After all, I will only buy stocks at very attractive prices.
Buying right is all about timing
Like so many things in life, it’s all about the timing. But, there’s good thinking about timing and there’s bad thinking about timing.
Let’s look at some examples of bad thinking about timing. Take today. Is it a good time or bad time to invest in stocks? I can think of lots of reasons to persuade myself it’s a bad time. In early February 2022 the stock market has started the year very weakly. January is often thought of as a barometer or precursor to how the year will turn out. Lots of observers are saying the stock market is really richly priced. Covid is still very much with us and will probably become endemic. Inflation is running hot. The Fed is moving forward with quantitative tightening which could raise long term interest rates and stifle the economy. The Fed will certainly start raising short terms rates. How many hikes and how soon is still uncertain. They may overdo it and bring on a recession and persistent stagnation and deflation in the economy. And, we might have war in Europe. With this thinking, it must be a very bad time to buy stocks. In fact we might even persuade ourselves to go to cash, or gold or bitcoin.
But, for thoughtful long term investors that kind of thinking is completely mistaken. It is allowing yourself to be guided by all the noise. It’s bizarre but most market commentators spend an inordinate amount of time speculating about this noise. I see and hear it every day.
It’s only when you get a pitch in your happy zone that it’s a good time to invest in stocks.
John Templeton explains
Sir John Templeton was educated at Yale and Oxford and founded the Templeton Growth Fund in 1954. In his 1980 book The Money Masters, John Train reports that over the 20 years ending December 31, 1978 The Templeton Growth Fund was the top performer of all funds over the previous 20 years. (Train, 1980) p.160. Templeton pioneered global diversification in the mutual fund industry. He was probably one of the two or three greatest investors of the 20th century.
Templeton developed 24 of what he called Maxims for successful investing. I suggest all investors should be familiar with them.
{{{ To look at all of John Templeton’s maxims in their original 1982 version and other materials in the Motherlode such as rules to counteract behavioral biases, go to the Motherlode tab above and look down at the bottom of the Table of Contents. You can also go directly to the Maxims here.
They can also be found in (Proctor & Phillips, The Templeton Touch, 1983, 2012) p.153 although in a slightly different form.}}}
Templeton’s Maxim 14 reads: “Too many investors focus on “outlook” and “trend.” Therefore, more profit is made by focusing on value.”
He is referring to the outlook and trend for both the economy and the stock market.
It’s that simple
The “outlook” and “trend” are what I describe above as noise. One should never buy or sell a stock based on the outlook or trend.
One should buy a stock based on the quality of the company and the attractiveness of the price.
Ben Graham calls it timing “by way of price”
Benjamin Graham makes a distinction between ‘the way of timing’ and ‘the way of pricing’. He writes:
“Since common stock, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from these pendulum swings. There are two possible ways by which he may try to do this: the way of timing and the way of pricing. By timing we mean the endeavor to anticipate the action of the stock market – to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward. By pricing we mean the endeavor to buy stocks when they are quoted below their fair value and to sell them when they rise above such value.” (Graham, The Intelligent Investor, fourth revised edition. 1973) p.95.
Of course, ‘the way of pricing’ is the way to go. ‘The way of timing‘ is not.
Conclusion
In this post we have looked at the question of when is the best time to buy a stock. The important thing is to put the noise in perspective. It took me years before I really cottoned onto the idea that the ‘way of pricing’ was the best way to invest. Of course it’s not easy to estimate the value of a stock. But, that’s a subject for another day.
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For other posts related to the topic of market timing see here and here.
Why you can safely ignore market (and economic) predictions.
The cornerstone of investment success
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To read further on this subject in the Motherlode take a look at these sections in Chapter 26
26.01 Timing by way of pricing
26.02 In the doghouse and woebegone regions
26.03 Some of the reasons stocks may sell at bargain prices
26.04 Margin of safety and company quality
26.05 Margin of safety leads to superior returns
26.06 Waiting for a soft pitch in the happy zone
26.07 Margin of safety and point of maximum pessimism
26.08 Keep it simple but do your homework
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You can reach me by email at rodney@investingmotherlode.com
I’m also on Twitter @rodneylksmith
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Check out the Tags Index on the right side of the Home page that goes from ‘accounting goodwill’ to ‘wisdom of crowds’. This will give readers access to a host of useful topics.
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You can also use the word search feature on the right hand side of this page to find references in both blog posts and also in the Motherlode.
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There is also a Table of Contents for the whole Motherlode when you click on the Motherlode tab.
Want to dig deeper into the principles behind successful investing?
Click here for the Motherlode – introduction.
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