loader from loading.io

33 - Low stock prices are better than high stock prices (Investing First Principle)

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

Release Date: 06/30/2019

42 - How to invest in a Health Savings Account (HSA) show art 42 - How to invest in a Health Savings Account (HSA)

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

A health savings account is the best tax-advantaged account currently available for workers in the United States. Thus, it is important to have a plan and understanding of how to invest your HSA money and maximize the benefits of this unique tax shelter.

info_outline
41 - Science of Hitting Interview: How quality limits investing mistakes, portfolio management, and Microsoft ($MSFT) show art 41 - Science of Hitting Interview: How quality limits investing mistakes, portfolio management, and Microsoft ($MSFT)

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

In this episode, I interview 'The Science of Hitting' an investor and writer for GuruFocus. Learn how quality businesses can reduce investing mistakes by limiting value traps.

info_outline
40 - When NOT to average down on an investment (Investing Rules) show art 40 - When NOT to average down on an investment (Investing Rules)

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

Investing rules help to prevent mistakes and can function as outsourced knowledge from the world’s best investors. Allowing others to make mistakes and adapting their lessons is a cheat code that can help you become a better investor faster.

info_outline
39 - Market Expectations vs Your Investing Expectations show art 39 - Market Expectations vs Your Investing Expectations

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

Investing expectations drive short-term changes in the market. However, your personal expectations of management and business performance will drive the strength of your conviction in a company. Don’t let Mr. Market dictate your investing decisions. Mr. Market’s price offers should only ever be seen as an opportunity, not a necessity to act.

info_outline
38 - Should you invest in Private Prisons? show art 38 - Should you invest in Private Prisons?

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

The private prison industry in the United States is currently hated to an extreme. Opportunity could await as CXW and GEO offer 10%+ dividend yields.

info_outline
37 - Liquidity: Risks and Opportunities show art 37 - Liquidity: Risks and Opportunities

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

Liquidity is important for the success of your personal finance journey and your investment portfolio. Learn about the risks and opportunities presented by liquidity. Access to low liquidity stocks is your greatest advantage as a DIY Investor.

info_outline
36 - What is Risk? Price Risk, Volatility, and Beta (Types of Investing Risk) show art 36 - What is Risk? Price Risk, Volatility, and Beta (Types of Investing Risk)

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

What is Risk? There are many different types of investment risk. This episode focuses on the concept of price risk otherwise known as Volatility or Beta. All risks have two key elements: Uncertainty and Negative Events. The negative event of price risk is a decline in stock price below a company’s intrinsic value.

info_outline
35 - Shorter Holding Periods are better (Investing First Principle) show art 35 - Shorter Holding Periods are better (Investing First Principle)

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

Investing First Principles are used to build the foundation for an investment and portfolio management strategy. All else equal shorter holding periods are better when you earn the same total return. Would you rather earn a 10% return in one year or ten years?

info_outline
34 - Companies with no debt are better than companies with debt (Investing First Principle) show art 34 - Companies with no debt are better than companies with debt (Investing First Principle)

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

Investing First Principles are used to build the foundation for an investment and portfolio management strategy. Today’s first principle focuses on corporate debt. You should always prefer to buy stock in companies without debt compared to companies with debt, all else equal.

info_outline
33 - Low stock prices are better than high stock prices (Investing First Principle) show art 33 - Low stock prices are better than high stock prices (Investing First Principle)

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

Investing First Principles are used to build the foundation for an investment and portfolio management strategy. Today’s first principle focuses on stock purchase prices. Buying stocks at low prices is better than buying stocks at high stock prices. The result is a higher margin of safety and a higher potential return.

info_outline
 
More Episodes

Mental Models discussed in this podcast:

  • Margin of Safety
  • Price vs Value
  • Time Value of Money
  • All Else Equal
  • First Principles

Please review and rate the podcast

If you enjoyed this podcast and found it helpful, please consider leaving me a review. Your feedback helps me to improve the podcast and grow the show's audience. 

Support the Podcast on Patreon

This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.

You can find out more information by listening to episode 11 of this podcast.

Low stock prices are better than high stock prices (Investing First Principle) - Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode33

It is preferable to purchase stocks at low stock prices for 2 key reasons

  1. The margin of safety is higher (What happens if you are wrong)
  2. Potential Return is higher (What happens if you are right)

Relationship between Price and Value

  • Value investing, at its core, is all about purchasing assets for less than they are worth. 
  • Price represents what you pay
  • Value is what you receive
  • Obviously, the lower the price you pay, the better the outcome. (Regardless of the value you actually receive)

"All Else Equal" considerations

  • Time Value of Money - You can’t directly compare the stock prices across time. (ie. today versus the stock price one year ago.) It’s quite possible that it makes sense to pay a higher price today than it did a year ago if the value has increased. 
  • Variable Business Quality - Some businesses are of higher quality than others. You can’t directly compare one company’s P/E ratio to that of another. A high-quality business might be worth 20x P/E while another business is only worth 10x P/E. It would be a mistake to assume the 10x P/E company is a better deal. 
  • Variable Growth Rates - Some businesses have the capability of profitably growing their earnings, and others do not. Those with profitable and sustainable growth in the future are going to be worth more. You can’t directly compare P/E ratio’s in that circumstance. 
  • Industry Differences - some industries are more attractive than others

Summary

The scope of this first principle is limited to simply understanding that your goal is to purchase the highest amount of present and future earnings possible. The way you do this is by paying a low price for those earnings.