It is time to reflect on stock purchases. Over the past six months, I bought a total of 6,000 shares in 16 very different companies, at a total cost of $24,756. If we add their profits, the companies earned a total $1,012 and had a book value of $20,561. On the portfolio level, I paid a hefty price of about 20 times the past earnings and a more reasonable price to book value of 1.2 times.
I invested in these companies for three reasons. First, companies such as Bon Ton Department Stores and Famous Dave traded at a valuation below their competitors. I expect that their values will align with the competition in the future.
Second, other companies I found were trading below their 10-year historical multiple to earnings. Take Regal Entertainment Group, as an example. Over the past decade, the average earnings multiple was between 28 and 19 times. I purchased the position at 17 times the 10-year average earnings per share.
I would get back 93 cents for every dollar I invested in the portfolio of companies if I was to trade my portfolio of companies for cash. I experienced a substantial decline in market value with Vitamin Shoppe and RAIT Financial Trust. While the latter lost 32% in market value and the former lost 85% (ouch, that was painful to write), their overall negative effect on the portfolio was 5% and 4%, respectively. I received $388 in dividends from these companies to date and expect to receive an additional $848 in 2018, an expected yield of 3.5%.
While I am indifferent to a 7% decline in market value, I have one regret. I should never have purchased a position in RAIT Financial Trust. As I wrote to you, the company had a tremendous amount of liabilities with little equity. And while it was fairly easy to see that, I led myself to believe otherwise. I plan to keep this position in 2018 - just to remind myself of the potential, dire consequences of rash decisions.
Two lessons can be observed from these recent purchases. The first lesson is one stock should rarely represent more than 15% of your portfolio. By having this rule of thumb, the steep decline in value for RAIT Financial Trust had less than a 5% effect on the portfolio.
It is a popular cliché that the only assurance in life are death and taxes. I would add that mistakes are of certainty as well. So diversification, defined as an equity position in 15 to 30 companies, is one of the tools I use to allow for future mistakes.
The second lesson is that market fluctuations should be taken lightly. As long as you don't invest using a margin account or develop the bad habit of shorting stocks (some would argue that shorting stocks is a vice), the practical effect of the changes in the quoted prices, assuming you plan to hold them for three- to five-years, is nil.
If a person runs down your street, frantically yelling that he is willing to purchase all the homes on your block for 60 cents on the dollar, how would you react? Would you immediately sell your home?
My guess is that you wouldn’t. And similarly, quoted prices on stocks you purchase, if you are confident in your analysis and investment, are best to be ignored.
What's next? Other than to research and to write about investment topics, I don't expect much investment actions. Over the next months, I plan to write about the tools I use to find stocks, how I research stocks and what my criteria are to purchase a position in a company.
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For now - Happy Holidays!