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Psychology of buying a stock at a certain price


frugalchief
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Hindsight might be 20/20....

 

In 2011, Buffett clearly outlined why BRK was willing to buy stock back at 110% of BV.  Then subsequently raised it to 120%.

 

Charlie and I have mixed emotions when Berkshire shares sell well below intrinsic value. We like

making money for continuing shareholders, and there is no surer way to do that than by buying an asset – our

own stock – that we know to be worth at least x for less than that – for .9x, .8x or even lower. (As one of our

directors says, it’s like shooting fish in a barrel, after the barrel has been drained and the fish have quit flopping.)

 

Back to hindsight....in 2011 BRK would've paid no more than ~$120,000/ share on the buybacks.  While cash was increasing, investments, and acquisitions, (and the hope that one of the best companies in the world would continue to grow) why not pay a premium to buy back more stock?  Short-term this might have been not the wisest decision, but again, hindsight, in the time since (past 3 years) the purchase would've made us more money as the price has almost doubled.

 

Which is my question - I, like most of you, will be a net buyer of stock for many many years, wanting prices to languish for these years so I can increase my holdings.  Since I'm not looking to cash out my stock around 2-3 decades from now to support my living and giving needs, is it not an OK decision to buy at the premium instead of waiting weeks/ months/ years for the price to fall to an adequate level (110-120% of BV)??  Or do you just stock pile cash and wait until price is within the range of value?

 

We could've sat on our hands the past 3 years waiting for BRK to get to the 120% BV range, all the while the stock price has increased 80% and BV has 40%.

 

I know this isn't the right way of thinking about it.  Please correct me.

 

Thx,

FC

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read up on nassim taleb's antifragility (reading amazon reviews will do, the book mostly rambles on for way to long). If I have a large amount of cheap stocks to pick from, and I concentrate in the best ones, I never worry on missing out. I can be very picky. If you stare yourself blind on one stock, and you would really like it at 20$, but it is at 27$, you won't mind if you miss out the move to 40$ a year later because you were invested in another cheaper stock.

 

Probably the most important reason most people do not have killer returns is that they do not turn over enough rocks and settle for a somewhat cheap stock. If you really want mr market to serve you, you need to have enough stocks to pick from. Otherwhise it is pretty hard to be disciplined. You constantly have anxiety of missing out.

 

 

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read up on nassim taleb's antifragility (reading amazon reviews will do, the book mostly rambles on for way to long). If I have a large amount of cheap stocks to pick from, and I concentrate in the best ones, I never worry on missing out. I can be very picky. If you stare yourself blind on one stock, and you would really like it at 20$, but it is at 27$, you won't mind if you miss out the move to 40$ a year later because you were invested in another cheaper stock.

 

Probably the most important reason most people do not have killer returns is that they do not turn over enough rocks and settle for a somewhat cheap stock. If you really want mr market to serve you, you need to have enough stocks to pick from. Otherwhise it is pretty hard to be disciplined. You constantly have anxiety of missing out.

 

+1

 

That's what I see, for us small investors the universe is so large that if in doubt move on......

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If you believe Berkshire will trade at the same price to book in 7-10 years (ie 1.3-1.4x), in 7-10 years, Berkshire will likely at least double from here (if not, it will be because we had a second Great Depression). That's something like a 10% to 7% annual rate of return. If you are content with that, then invest. Expect a very very rocky ride because in that period, I expect a new monetary order.

 

Leveraged, its pretty good. Unleveraged, its average (although I am certain it will destroy the S&P over the next 7-10 years because the S&P can not go up much further unless we have some sort of massive inflation).

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"The reason lies in the fact that you don't know @ the time whether a better opportunity will show up in the near future for you to deploy the cash. So buying @ 1.3x BV could be an issue if better opportunities arrive."

 

Couldn't you just issue stock and/or sell stock in the acquisition even if you bought back your shares? That way you can hedge no opportunity with the flexibility to buy something big if it came along.

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is it not an OK decision to buy at the premium instead of waiting weeks/ months/ years for the price to fall to an adequate level (110-120% of BV)??  Or do you just stock pile cash and wait until price is within the range of value?

 

 

My two thoughts:

 

1.  Why buy company A at a premium when another likely exists with similar prospects but a better price relative to intrinsic value.

 

2.  The longer I've been an investor the more I've come to realize that you'll likely get another bite at the apple you desire.  Prices go up and down all of the time.  Pick 10 random companies and look at their 52 week highs and lows for each of the last few years.  Chances are that for almost every one of them there will be a 50 to 100% difference from their annual low to their annual high year after year.  Intrinsic value obviously doesn't fluctuate that much, but yet the prices do.  Year after year.  That may not have been the case for Berkshire, but it is for many others.  Take advantage of those situations when they exist for good quality businesses.

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"The reason lies in the fact that you don't know @ the time whether a better opportunity will show up in the near future for you to deploy the cash. So buying @ 1.3x BV could be an issue if better opportunities arrive."

 

Couldn't you just issue stock and/or sell stock in the acquisition even if you bought back your shares? That way you can hedge no opportunity with the flexibility to buy something big if it came along.

 

Let's play it through...

 

You spend cash (valued @ 100% of IV) to buy a company worth 2.0x BV @ 1.3x BV. Something big comes along later that you want to buy with the cash you just spent.

 

What would be a value neutral stock issuance to make the acquisition?

 

The answer is very simply that you would have to issue the same number of shares that you bought @ 1.3x BV -- if you issue more than that, you are diluting IV by giving out 2.0x BV per share @ 1.3x BV per share beyond what you bought in originally.

 

What happens if your book value declines below 1.3x at the point in time when you want to make the acquisition? Well, then you would have been better off in cash.

 

Again, implicitly, the 1.2x BV calculation was a calculation not just of possible return on cash employed but on possible cash opportunity cost.

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Since I'm not looking to cash out my stock around 2-3 decades from now to support my living and giving needs, is it not an OK decision to buy at the premium instead of waiting weeks/ months/ years for the price to fall to an adequate level (110-120% of BV)??

Your reasoning is sound if BRK is the only stock you would buy. As intrinsic value grows at a decent rate it is better to buy than to speculate it will drop first because it goes higher. But for those that want high returns and have a lot more stocks to choose from, it seems better to buy it only when BRK is clearly cheap and try to find something cheaper the rest of the time.

As Buffett follows a lot of companies, he doesn't have to buy it back at a higher premium.

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is it not an OK decision to buy at the premium instead of waiting weeks/ months/ years for the price to fall to an adequate level (110-120% of BV)??  Or do you just stock pile cash and wait until price is within the range of value?

 

 

My two thoughts:

 

1.  Why buy company A at a premium when another likely exists with similar prospects but a better price relative to intrinsic value.

 

2.  The longer I've been an investor the more I've come to realize that you'll likely get another bite at the apple you desire.  Prices go up and down all of the time.  Pick 10 random companies and look at their 52 week highs and lows for each of the last few years.  Chances are that for almost every one of them there will be a 50 to 100% difference from their annual low to their annual high year after year.  Intrinsic value obviously doesn't fluctuate that much, but yet the prices do.  Year after year.  That may not have been the case for Berkshire, but it is for many others.  Take advantage of those situations when they exist for good quality businesses.

 

+1

I'll add to this that sometimes you just have to wait. 

 

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Thanks all.  :D  Of course, always see if there are cheaper businesses to buy.

 

But in a stale environment with no cheap ideas, it's better to hold cash then pay premium for a stable business?

 

But I think most on this board don't think this is a stale environment. There are lots of dirt cheap stocks in russia, japan, and certain parts of europe.

 

But it the entire world is out of bargains, ya, I would hold cash.

 

 

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Hindsight might be 20/20....

 

In 2011, Buffett clearly outlined why BRK was willing to buy stock back at 110% of BV.  Then subsequently raised it to 120%.

 

Charlie and I have mixed emotions when Berkshire shares sell well below intrinsic value. We like

making money for continuing shareholders, and there is no surer way to do that than by buying an asset – our

own stock – that we know to be worth at least x for less than that – for .9x, .8x or even lower. (As one of our

directors says, it’s like shooting fish in a barrel, after the barrel has been drained and the fish have quit flopping.)

 

Back to hindsight....in 2011 BRK would've paid no more than ~$120,000/ share on the buybacks.  While cash was increasing, investments, and acquisitions, (and the hope that one of the best companies in the world would continue to grow) why not pay a premium to buy back more stock?  Short-term this might have been not the wisest decision, but again, hindsight, in the time since (past 3 years) the purchase would've made us more money as the price has almost doubled.

 

Which is my question - I, like most of you, will be a net buyer of stock for many many years, wanting prices to languish for these years so I can increase my holdings.  Since I'm not looking to cash out my stock around 2-3 decades from now to support my living and giving needs, is it not an OK decision to buy at the premium instead of waiting weeks/ months/ years for the price to fall to an adequate level (110-120% of BV)??  Or do you just stock pile cash and wait until price is within the range of value?

 

We could've sat on our hands the past 3 years waiting for BRK to get to the 120% BV range, all the while the stock price has increased 80% and BV has 40%.

 

I know this isn't the right way of thinking about it.  Please correct me.

 

Thx,

FC

 

I think you describe a "right way of thinking" -  :D

 

Discount to intrinsic value has a time dimension.  And where I am dealing with businesses with high predictability (operations, management, capital policy) I'm perfectly happy to pay up a "few months" so to speak. Say you overpay 5% for a business you expect to return 15% per year for the next 40 years of your life.  So what!  You're better of making sure you buy it and then those 4 months you overpaid...well...go to the gym, eat healthy, try and get those 4months back in life expectancy  ;D

 

 

 

 

 

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We may be overlooking  another aspect to the 1.2xBV GTC buy order. At today's average trading volume of ~300 A shares per day and the current BV of $150,000(est YE 2014), the $50Billion cash hoard will allow them to buy back shares for 926 trading days or about 3.7 years straight. Should the stock come under a short term downward pressure and starts to actually trade at 1.2xBV, Berkshire will be in a rock solid position to effectively swat away any resistance like short interest etc.

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