Tags: 2012 | Rotating | Value

Make Your Money When You Buy, Not When You Sell

Tuesday, 03 Jan 2012 08:33 AM

By Andrew Packer

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“I’m willing to do anything to lose some weight, unless it involves diet or exercising.”

That’s something I jokingly said to a friend over dinner recently. We were discussing our goals for 2012.

Ah, the start of a new year. Full of promise, and resolutions to better oneself. Alas, laziness and inertia all too often sets in. Yes, we all know that exercise is good, and maybe we shouldn’t eat that donut.

Fortunately, unlike weight loss, most investors don’t need daily commitment to make significant changes in their fortune. They can just use the start of a fresh, new year to sell overpriced assets they own and rotate into better valued ones.

How does this work? It’s simple.

When investing, you make your money when you buy, not when you sell.

If you pay too much from the start, your only way to profit is to hope that some sucker comes along and is willing to pay a much higher price. If you underpay, you can comfortably own a position for years, letting dividends and capital gains accrue.

One such strategy, the Dogs of the Dow, is to buy the 5 or 10 highest yielding stocks out of the 30 that trade on the Dow. An investment in these companies in 2010 and 2011 would have slightly outperformed the Dow itself.

While the strategy may be simple, it’s not always useful. The Dogs of the Dow were laggards from 2001-2010. Why? Because the stock market peaked in inflation-adjusted terms and began a decade of decline. Essentially, those who followed the Dogs of the Dow strategy were still overpaying to begin with.

Here’s an example. In July 1998, investors could buy a share of Coca-Cola (KO) for $87. They paid more than 70 times earnings. They received a pittance of a dividend.

In January 2012, investors can buy a share of Coke for $70, and pay only 13 times earnings for the world’s most powerful brand. The 2.7 percent yield reflects a dividend that’s more than tripled since 1998. Investors who buy today are much more likely to be rewarded for owning shares than investors who bought 14 years ago, who are still down on their investment.

Indeed, similar claims can be made for many common stocks. After falling (again, when adjusted for inflation) for more than a decade, stocks are starting to offer a compelling level of valuation. It certainly helps that other assets, such as bonds, have performed so well that their yields are so low and prices are so high that they look like a bubble.

It’s important to make your buying decisions carefully. That’s where the money is really made.

© 2014 Moneynews. All rights reserved.

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