{"id":311,"date":"2016-09-08T16:25:37","date_gmt":"2016-09-08T15:25:37","guid":{"rendered":"http:\/\/frugalstudent.co.uk\/?p=311"},"modified":"2016-09-08T16:27:23","modified_gmt":"2016-09-08T15:27:23","slug":"now-always-time-buy-shares","status":"publish","type":"post","link":"https:\/\/frugalstudent.co.uk\/index.php\/2016\/09\/08\/now-always-time-buy-shares\/","title":{"rendered":"Undervalued stock? Don&#8217;t wait for a correction BUY NOW!"},"content":{"rendered":"<ul>\n<li>Perceived &#8216;discounts&#8217; obtained by waiting for a stock&#8217;s price to drop are often less than anticipated due to missed dividends<\/li>\n<li>Is the discount obtained from waiting for a stock to drop worth the risk of not owning it at all?<\/li>\n<li>This article will show how waiting just 3 quarters for a 5.5% discount erodes the real discount by 2.2%<\/li>\n<li>Investors waiting for a price to drop are fighting against time and the market.<\/li>\n<\/ul>\n<p>.<\/p>\n<p>&#8220;The market is overvalued&#8221;<\/p>\n<p>&#8220;A correction is looming&#8221;<\/p>\n<p>&#8220;We&#8217;re going into recession&#8221;<\/p>\n<p>These are some phrases I&#8217;ve become used to reading, especially over the past few months.<\/p>\n<p>Some &#8216;investors&#8217; it would seem, are putting of buying shares due to their perceived valuation of the market.<\/p>\n<p>But investors should always remember that;<\/p>\n<p>&#8220;<em>Time in the market beats timing the market&#8221;<\/em><\/p>\n<p><span style=\"text-decoration: underline;\"><strong>Why you shouldn&#8217;t try time that market<\/strong><\/span><\/p>\n<p>When I first started investing, I went at it &#8211; trying to time the market and shares.<\/p>\n<p>I would insist, for example, that I would only buy a stock, let&#8217;s say &#8216;stock x&#8217; if it dropped from \u00a31 to 90p (a 10% discount).<\/p>\n<p>But what I soon realised is that most shares wouldn&#8217;t drop, and the market correction that I was predicting along with many analysts just wasn&#8217;t happening.<\/p>\n<p>In fact, market corrections have been predicted for over two years now.<\/p>\n<p>We&#8217;re still waiting.<\/p>\n<p><span style=\"text-decoration: underline;\"><strong>If it&#8217;s undervalued buy it &#8211; even &#8216;if it has further to drop&#8217;.<\/strong><\/span><\/p>\n<p>Let&#8217;s take a real life example.<\/p>\n<p>A friend of mine really wanted to buy some shares in Kraft Heinz in January\u00a0last year. The shares, having just come back from a price below $70 looked attractive, but he told me that he&#8217;d wait until the shares dipped below $70 again before buying in.<\/p>\n<p>That never happened and now the shares sit at close to $90.<\/p>\n<p>A great company with an attractive yield missed, simply for a few $.<\/p>\n<p>A current example is Flower Foods which currently sits at just above $15. At this price, the stock has a dividend yield of 4.2% and is trading at low p\/e multiples compared to its history.<\/p>\n<p>Yes, the company currently has a few issues but I was amazed to see investors saying they are &#8220;waiting for the price to drop further&#8221;.<\/p>\n<p>Some speculators have noted a current legal issue facing the company and the way it employs its drivers as a factor for further price reductions.<\/p>\n<p>This is a dangerous strategy which ignores the fact that the shares are\u00a0<strong>currently\u00a0<\/strong>overvalued. There&#8217;s a very simple message for these investors;<\/p>\n<p>Let&#8217;s take a look at how much is saved by waiting for a mear 5% drop in the price of a stock.<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p><span style=\"text-decoration: underline;\"><strong>Flower foods at $15.71 vs Flower foods at $14.85<\/strong><\/span><\/p>\n<p>&nbsp;<\/p>\n<p>Let&#8217;s say an investor will only buy Flower Foods below $15. I bought in at $15.71, therefore if the investor manages to predict the market (against the odds it would seem) and buy in at $14.85 then he\/she has achieved a 5.5% right?<\/p>\n<p>Wrong.<\/p>\n<p>Here&#8217;s why that number is in fact only 3.3%<\/p>\n<p><img decoding=\"async\" loading=\"lazy\" class=\"wp-image-312 aligncenter\" src=\"http:\/\/frugalstudent.co.uk\/wp-content\/uploads\/2016\/09\/FLOWER-300x223.png\" alt=\"flower\" width=\"492\" height=\"366\" srcset=\"https:\/\/frugalstudent.co.uk\/wp-content\/uploads\/2016\/09\/FLOWER-300x223.png 300w, https:\/\/frugalstudent.co.uk\/wp-content\/uploads\/2016\/09\/FLOWER.png 653w\" sizes=\"(max-width: 492px) 100vw, 492px\" \/><\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>Point one shows the shares at $23.50. At this price, I would not have considered purchasing the shares, deeming them to be too expensive.<\/p>\n<p>At $15.71 on February 12th , the share&#8217;s are looking undervalued and I decide to pull the trigger and buy. (Let&#8217;s say 100 share to keep the maths simple).<\/p>\n<p><span style=\"text-decoration: underline;\"><strong>Scenario 1 Buying in February\u00a0<\/strong>($15.71 a share)<\/span><\/p>\n<p>In March I receive a dividend of $0.145 per share.<\/p>\n<p>March income = $0.145 x 100 = $14.50<\/p>\n<p>I reinvest the dividends on the 18th of March (payment date) to purchase 0.77 share&#8217;s of Flower foods.<\/p>\n<p>In June I receive a dividend of $0.16 per share.<\/p>\n<p>June income = 0.16 x 100.77 = $16.12<\/p>\n<p>I reinvest the dividends on the 23rd of June to purchase 0.9 shares of Flower foods.<\/p>\n<p>In September I received a dividend of $0.16 per share.<\/p>\n<p>September income = 0.16 x 101.67 = $16.27<\/p>\n<p>I reinvest the dividends on the 8th of September (for illustrative purposes as dividend is paid on the 9th) to purchase 1.07 shares of Flower Foods.<\/p>\n<p>I now have 102.74 share&#8217;s of flower foods for my initial $1,571 investment.<\/p>\n<p><span style=\"text-decoration: underline;\"><strong>Scenario 2 &#8211; Buying in August\u00a0<\/strong>($14.95 a share)<\/span><\/p>\n<p>On August 11th share&#8217;s drop below $14.95 so investors who waited for the shares to drop below $15 buy.<\/p>\n<p>They buy 100 shares for $1,495.<\/p>\n<p>The investor receives the September dividend of $0.16<\/p>\n<p>September income = $0.16 x 100 = $16<\/p>\n<p>The investor reinvests the dividends to purchase 1.05 shares of flower foods.<\/p>\n<p>The investor now has 101.05 shares of flower foods for their $1,495 investment.<\/p>\n<p><span style=\"text-decoration: underline;\"><strong>Result<\/strong><\/span><\/p>\n<p>Cost per share;<\/p>\n<p>Me: 1,571\/102.74 = $15.29 a share<br \/>\nInvestor 1: 1495\/101.05 = $14.79 a share<\/p>\n<p>% Difference<\/p>\n<p>3.3% saving in favour of &#8216;investor 1&#8217;<\/p>\n<p>So, it appears that taking the risk of the share price increasing has saved investor one a mere 3.3%,<\/p>\n<p>But, extend this over a few more quarters and the margin of discount decreases.<\/p>\n<p>Here was an example of three quarters of dividends, what if the wait was over 6 quarters.<\/p>\n<p>The lesson is simple, the longer the time period, the more the cost of not investing is.<\/p>\n<p>I like to be sure, so why not lock in that undervalued dividend paying stock and get your money to work!<\/p>\n<p>This time investor 1 got lucky. But will Flower foods drop below $13.50 or $10. Who knows? Frankly, I don&#8217;t want to wait to find out.<\/p>\n<p><span style=\"text-decoration: underline;\"><strong>Conclusion<\/strong><\/span><\/p>\n<p>The longer one waits before buying a dividend stock, the more the cost of not investing becomes.<\/p>\n<p>The above example begs the question, Is waiting for the price to drop really worth risking a guaranteed purchase of an undervalued company?<\/p>\n<p>Isn&#8217;t it better to\u00a0lock in a deal and put my capital to work with a 4.2% yield as opposed to the close to 0% I&#8217;d get in the bank at current interest rates?<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Perceived &#8216;discounts&#8217; obtained by waiting for a stock&#8217;s price to drop are often less than anticipated due to missed dividends Is the discount obtained from waiting for a stock to&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3],"tags":[],"_links":{"self":[{"href":"https:\/\/frugalstudent.co.uk\/index.php\/wp-json\/wp\/v2\/posts\/311"}],"collection":[{"href":"https:\/\/frugalstudent.co.uk\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/frugalstudent.co.uk\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/frugalstudent.co.uk\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/frugalstudent.co.uk\/index.php\/wp-json\/wp\/v2\/comments?post=311"}],"version-history":[{"count":0,"href":"https:\/\/frugalstudent.co.uk\/index.php\/wp-json\/wp\/v2\/posts\/311\/revisions"}],"wp:attachment":[{"href":"https:\/\/frugalstudent.co.uk\/index.php\/wp-json\/wp\/v2\/media?parent=311"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/frugalstudent.co.uk\/index.php\/wp-json\/wp\/v2\/categories?post=311"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/frugalstudent.co.uk\/index.php\/wp-json\/wp\/v2\/tags?post=311"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}