It seems that my monthly stock purchase posts are becoming a little too predictable. I tend to always start by saying that the market seems overvalued right now. The reason is because I really believe it is so. Having said this, I need to constantly remind myself that just because the market is high does not necessarily mean that I should stop investing. I need to remind myself that I am not investing in the market, but rather in individuals businesses.
Making money in inflated markets
The S&P 500’s “CAPE” ratio (a stock valuation measure designed to smooth out earnings volatility) has only been this high or higher three times in the last century – right before the crashes of 1929, 2000, and 2007. That means many stocks are expensive.
But just because a stock market index like the S&P 500 is pricey doesn’t mean there aren’t good values out there. Unless you’re a buyer of the index itself, it is not relevant to the business of finding great stocks today.
Let’s look at a historical example…
The 17-year stretch from 1966 to 1982 was dead money for stocks – or so many people would have you believe. The Dow Jones Industrial Average basically went nowhere. And if you factor in the period’s high inflation, the performance was even worse. Based on this, you might think that you didn’t want to be in stocks at that time.
But here’s is what research and the facts suggest: there were 187 stocks you could’ve bought between 1966 and 1982 that would have multiplied your money 100 times.
In fact, during that 17-year stretch, you’d have had at least a dozen opportunities each month to multiply your money 100 times if you just held on.
In some cases, you didn’t even have to wait very long. Southwest Airlines (LUV) returned more than 100 times in about 10 years beginning in 1971. Leslie Wexner’s L Brands (LB), owner of Victoria’s Secret, did it in about eight years starting in 1978. In 1966, you could’ve bought H&R Block (HRB) and turned a $10,000 investment into $1 million in less than two decades.
So the indexes can tell you what kind of environment you are in. But they don’t predict what will happen to individual stocks.
It’s certainly harder to find great opportunities in highly priced markets. And it’s easier to find big winners at market bottoms (but perhaps not so easy to make yourself buy them, as fear is rife at such times). These facts should surprise no one.
So there you have it. Even though the overall market looks expensive, I need to remember that I am not buying the market. I am buying individual stocks.
Shares I bought in January
These are the following shares I bought in january
- Next: 4 shares at 4000p each. Retail has taken a real hammering over the past year and Next is no exception. The stock has dropped close to 50% over the past 12 month and to me this look like a great time to add to this free cash flow machine. I now have 10 shares in Next. Dividend Income from purchase: £6.4. This excludes the special dividend announced which is 180p per share. If all income included, my purchase of Next has a dividend yield of 8.5%!
- Kcom: 220 shares at 89p each. I bought this telecom due to the predictable cash flows the business brings in and the yield which is currently in excess of 6%. Dividend Income from purchase: £13.068.
- Devro: 87 shares at 1.90 each. Shares in the company have fallen recently due to problems at new factory in America. But I see these operational problems as one off and I see huge growth potential for this castings maker. With a yield of over 4% and a dividend cover of 1.75, this looks like a stock that will do well going forward. Dividend Income from purchase: £7.65
In total, I expect to receive £34 in dividends from these purchases over the next year, including the Next special dividend. This is absolutely fantastic and it means that my income from dividends keeps moving higher.
As always, I intend to hold these shares for the long-term. Rather than take profit from capital gains, I hope to milk the cash flows these stocks produce. Your life can get so much easier if you identify the companies likely to be profitable two decades from now, figure out a good price to pay (a good rule of thumb is to never pay more than 20x earnings for a company), and then hold the stock and leave it alone. Let the earnings go up. Let the dividends roll in.Besides, the longer you hold stocks, the less risky they become.