I often get asked the question, “ why do you keep buying shares every month despite knowing the markets are looking toppy and valued highly? Why don’t you simply just sell your stocks and wait for the markets to crash and buy in at a cheaper price.”
I am sure the above line of thinking resonates with the majority of you. I am not afraid to admit that I used to follow that way of thinking before. Whilst simply sitting on cash and waiting for the markets to crash in order to buy shares more cheaply sounds good in practice, it is an extremely hard thing to do in the real world. Personally, I have felt the markets have been elevated since at least 2015. If I had sat out and not invested any money, my portfolio wouldn’t be showing the double digit gains it is now.
In a word, timing your entry and exit into the stock market is an almost impossible feat. Despite its allure, market timing has been proven time and time again to be a loser’s game.
Chris Browne, a former partner at the investment firm Tweedy Browne, explained market timing in an easy to understand way. Browne likened market timing to the manoeuvres of a driver who keeps switching lanes on the freeway when there is heavy traffic. He obviously thinks he can pick the lane that will move the fastest. Chris noted that it never seems to work. A mile ahead the driver who stayed in his lane invariably passes him. So it goes with market timing.
Empirical studies have shown time and again the fallacy that an investor can successfully time markets. Peter Lynch who managed one of the best performing mutual fund in history, the Fidelity Magellan Fund, is alleged to have remarked that over half the investors in his fund lost money as they kept buying into and selling out of the fund in an attempt to time it. Investors in the fund were lured in after a period of strong results and forced out after a few quarters of poor returns.
Now the above does not mean you should go all in today. Heck, I still have a sizeable amount of my portfolio in cash. But don’t just sit on the sidelines for the sake of sitting on the sidelines. There is always tidbits of value to be found in any market environment. Yes, certainly shares across the board will be cheaper when if a market crash or correction where to occur. But I don’t know when any such event would occur. Thus, I am trying to find the most decent valued stocks at present when I buy using my monthly stock purchase programme (LINK).
For the month of June, I bought the following stocks at the following prices:
- BAT – Bought 14 shares at £37.50 each
- Imperial Brands – Bought 7 shares at £25.9 each
- BT – Bought 77 shares at 2.07 each
As a result of these buys, my dividend income has increased by £51.47 a year. Considering I spent £865 on the above stocks, the yield on cost is a juicy 6%.
Looking at the buys above, the one that particularly stands out is BAT. Over the past few month, it has been trading at terrific values. One reason why Tobacco stocks across the board are changing hands at cheap levels is due to them being sin stocks which most big investors (think pension funds / sovereign wealth funds) don’t want to hold. I wrote about this before so have a look at the article titled ‘ BAT Stock Purchase – Why Sin Stocks Outperform The Markets Over The Long Term’ to see how and why sins rocks outperform the market.
Another reason for Tobacco stocks trading at low multiples is due to the threat of reduced smoker populations. There has been unprecedented change in the tobacco industry in the last couple of years with the rise of e-cigarettes and the changing regulatory environment. Looking at financial reports for all the major tobacco companies, you can certainly see that volumes are on a steady decline.
In doing my research into any stock, I look at the industry as a whole as well as proxies to the industry. Just like Caterpillar is a good proxy for Mining stocks or John Deere is a good proxy for agriculture, I believe Swedish match is a good proxy for the tobacco industry.
Swedish Match owns the world’s biggest match and lighter business. If you are a smoker, you have most certainly used its products at one point or another. Its matches brands include Solstickan, Swan Vestas and Tres Estrellas. Its lighters brands include Cricket.
Looking at the results of Sweditsh Match’s lights business in the quarter to March 2018, volumes in both matches and lighters were both down by 11% and 23%. This is certainly a material decline. And it should certainly give a good indication as to what is happening in the tobacco industry.
Looking at all the above, you might think that its all doom and gloom for big tobacco. But what if I was to tell you that the number of smokers will increase as oppose to decrease over the coming years? Would you believe me?
You see, what is happening at the moment is that smoker populations are shifting from the first world to the emerging world. And the emerging world is where the majority of the worlds populations is at. And companies like BAT who have deep entrenched roots in the emerging world are set to benefit through higher sales and profits.
At current prices, BAT is essentially being left for dead. It is being treated like Royal Dutch Shell was at the beginning of 2016. This time instead of the death of oil, its tobacco. There is so much bad news currently priced into the stock. I don’t think it would take much for the stock to start moving upwards again. All that needs to happen is for things to go from bad to less bad. And I think BAT will certainly do much better than that.
Monthly Stock List
I had a reader recently write to me asking if I would tell him in advance the stocks I will be buying via my monthly stock purchase programme. He said he would be willing to pay for this service. He thought this may be a useful extension to the website. I am willing to try this out provided I have sufficient numbers. If you are interested, please write to me via the contact form or contact me on firstname.lastname@example.org