If, in 1999 and 2000, when Colgate-Palmolive, Hershey, and Brown-Forman were each trading for 30x profits, you decided to buy shares anyway, the results would look like this:
The Colgate shares would have compounded at 8.15% annually, turning a $10,000 investment into $30,200.
Shares of Hershey, despite even higher valuation compared to Colgate, would have compounded at 11.50% annually over that time frame, turning a $10,000 investment into $46,500.
Shares of Brown-Forman, the excellent alcohol company that almost no one outside of Louisville or the investor community has ever heard of, has compounded at 15.60% annually since that time, turning $10,000 into over $77,500.
That adds a nuance to the investor’s dilemma: Value investors tend to desire a margin of safety before making an investment, but accept paying reasonable prices in the realm of 20x profits for a company that clearly possesses extraordinary attributes (Nestle, Procter & Gamble, and Pepsi immediately come to mind). The problem though is that Hershey and Brown Forman rarely get cheap or even present investors with an opportunity to buy shares at a fair price (what does it tell you when it takes a financial crisis to knock these stocks down to fair value), and the businesses are so strong that they still deliver great returns even when the shares only offer a starting earnings yield around 3-4% and a dividend yield half that.
It would seem to me that Hershey and Brown Forman are great candidates for dollar-cost-averaging mixed with a strategy of writing a large check for more shares when the opportunity arrives.
If you set your finances on autopilot to buy $100 worth of Hershey and Brown Forman each month, you can rest assured that over the long haul you will receive total returns that match the growth rate of those companies. They are excellent businesses that take care of their owners over the decades, and that is what makes the months when you overpay tolerable.
Also, as a backdoor technique to hedge against the overpayment factor, you can also be free to write a large check for more shares when the opportunity presents itself. If you had been buying $100 shares each month, their effects on your holdings would be greatly reduced by a $4,000 order to buy more shares of Hershey or Brown Forman when they fall 30% in the next correction. All of a sudden, that $1,500 worth of stock bought at a 28x earnings valuation gets dragged down by the $4,000 worth of stock purchased at 20x earnings, lowering the valuation of your entry points for each company on the whole.
This strategy seems to be the most response if you find yourself in the category of wanting to own Hershey and Brown Forman for the long term but lacking the patience or desire to wait until a 2009 type of situation to make your initial move. Dollar-cost-averaging for month after month, year after year, is the best way to achieve total returns that approximate the growth of the company, and if you mix that with the occasional large single purchase when the price becomes attractive, you can offset the smaller monthly purchases that occurred when the stock was pricey. Dipping your toes into the water bit by bit seems like the best approach to the blue-chips that deliver excellent total returns (in the case of Hershey, because it perpetually earns 16% annual returns on assets while Brown-Forman’s total returns on invested capital are similar) but never appear to offer a particular attractive entry price. In cases like that, let dollar-cost-averaging be your friend.