Keeping up with shares
When long-term investors find a great stock, they tend to stick to it and add more of it to their portfolios. How do you know that you are still buying the shares at a good price?
you’re never going to only buy a share once, unless it’s a dud. It happens, but duds tend to be the exception, rather than a common occurrence. So as a long-term investor, you’re likely to find a great stock at a great price; you’ll continue buying it over the years as the portfolio grows not only from growth in the stocks, but also from inflows of dividends, sales of some stocks and cash you add.
The problem is that investors are often fixated on the original price they paid for a stock and the return it provided. Let’s take Santova* as an example. My first purchase was at around 200c and then more at 268c, while the stock has moved to around 400c recently. After recent results I wanted more; sure, that would push my average purchase price higher, but that’s not a problem if it’s an awesome stock.
There are two problems if I don’t buy more: Firstly, the percentage of the stock in my portfolio will reduce over time as the other stocks grow. Secondly, if I don’t buy more of what I already have, what do I buy? I already own a selection of awesome stocks and can’t always be finding new stocks and expanding the overall number of shares I hold. The trick is not to chase a stock. Metrofile* is a stock I started buying earlier this year at 400c and lower; there wasn’t a lot of volume and I had bids in the market that sat patiently waiting for the sellers to come down to my level. That worked perfectly well, but then suddenly the stock rushed higher and I still had bids at under 400c while the stock was trading at some 475c. In this case I had managed to get some 75% of what I wanted, so it wasn’t the end of the world. I watched the stock for a few weeks, and eventually it settled at around 475c. I noticed that, if anything, the sellers had a slight upper hand in that there always seemed to be more sellers with higher volumes. This suggested that the stock might be moving lower. So far this is working, slowly. But the issue is that I like the stock at around 400c; at around 475c it’s almost 20% higher and I simply don’t like it as much at those levels. So I’m watching and waiting…in time I may end up paying the higher price as new earnings push valuations higher. I am a big fan of leaving bids in the market and often it pays off. In the case of Santova, I’ve had a bid at 400c for a while and last week (in an open auction) I suddenly got filled at 400c when a large seller exited in a hurry. Santova was only trading at around 415c – less than 5% higher – and I would have been happy to pay that price. But again, I watched the bids and offers, decided that there was most certainly more selling pressure, so a lower bid had a decent chance of success. This is not a perfect science and sometimes a stock gets away from you, but chasing a flying stock seldom results in buying at a good price. As a longterm investor, you should use that time to your advantage. If you miss a buying opportunity, another will come along in time.
This is not a perfect science and sometimes a stock gets away from you, but chasing a flying stock seldom results in buying at a good price.