It looks like Visa is a lover that does not stay the night. After closing on Friday at $71, the price of Visa collapsed quickly in Monday’s early morning trading to open at $64, come down to $60, and now, at the time of this current writing, the price of the stock has already bounced back to almost $70. It’s not even a 2% decline for the day. What started off as a significant one-day haircut ended up becoming a pedestrian garden variety trading day.
If you live on the West Coast and didn’t wake up until 8:30 local time, the entire fluctuation in the price of Visa’s stock came and left before you even got a chance to wake up. It puts me in an unfamiliar position–I’m not used to issuing one-day updates on the price of a company’s stock since long-term investing is usually immune to the need for constant updates.
However, today’s trading for Visa stock did provide two useful lessons, one philosophical and one pragmatic.
Philosophically, I was reminded that price is not an indicative of what a company is truly worth. There is no way that markets are rational. If you believed that all stocks were fairly priced all the time, you would have to argue that Visa’s fundamental, intrinsic value was $74 last week, $60 this morning, and almost $70 by Monday afternoon. At least one of those prices has to be wrong. The discipline of value investing is dedicated to figuring out when the rest of the world around you gets unduly optimistic.
The pragmatic lesson from today’s Visa experience is that it is always useful to have money that can instantly be invested upon the identification of a good opportunity. Having the knowledge to spot good buys is not enough. You need to arrange your affairs so that you can upon the opportunities that you recognize.
Most brokerage houses require one to three business days for money from a checking account to reach a brokerage account. Sometimes, a decline in stock price can last a few weeks, months, or even years, and the particular day of the investment does not matter. Other times, the opportunity only lasts for a particular moment, and you need to be prepared to take advantage of that moment.
If you had been eyeing Visa stock for most of the year, waiting for an opportunity to buy, you will be disappointed knowing that Monday August 24th saw the stock decline from $71 to $64 to $60 before returning to $70. If you weren’t around early morning, you didn’t get a chance to take advantage of that opportunity. Sure, you may get another one, but if wanted shares at $65 and were waiting on a share transfer, this particular instance amounted to a wasted opportunity.
You can improve your ability to take advantage of short-lasting attractive opportunities by doing two things. First, you can set up an alert for stocks that would trade at a price that would catch your attention. You can do this through Google and a host of other service. If you would stop what you were doing and buy BP if you knew that the price of the stock hit $25, then you should set up an alert that will ping you when the price falls to that amount. That way, you don’t have to be glued to stock screens all day to receive notice of a good opportunity. You should be selective about the companies and selected purchase prices that you do this for, so you shouldn’t receiving more than a dozen texts in a given year.
And secondly, you need to have the cash already on hand in a brokerage account so that you can take advantage of the opportunity. This is the critical portion that is easy to overlook. Trying to figure out what portion of your portfolio to keep in cash is more art than science, but you should keep at least enough that you could take advantage of the opportunities in the desired stocks you keep on your order. For most people, this would mean a cash allocation between 5% and 15%.
This is the super important part because knowledge that Hershey is a once-in-a-generation deal at $68 per share does you no good if you don’t have money available to act upon it. Your knowledge would become rendered as useless as the person that does not follow the stock market at all in the first place.
A lot of good things have happened this morning if you are a long-term investor. You can get Berkshire for $128 right now. You can get Diageo for $102. You can get Pepsi at $92 and Colgate-Palmolive at $62. I haven’t written about the latter two much lately for valuation concerns, but they are starting to get darn near my estimates of fair value. You can buy Nestle at $73. You can buy Johnson & Johnson at $93–that seems to fit snugly Buffett’s recommendation of “buying the wonderful company at a fair price.”
The prescription for getting rich has always been: find great long-term assets at a fair or better price, and then actually buy them when that moment arrives. Then, let them grow, while you use your available cash from labor and investment income to make new investments. Everything comes back to that. If you have a buy instinct in response to the news since last Monday, you’re already a winner. Everything you do–whether it is buying Nestle, Berkshire, or Chevron–will only affect whether you reach your destination at 60 MPH, 65 MPH, or 70 MPH.
For a lot of people seeking financial success, the question is “if.” For people that buy quality assets in response to declines, the only question is “when.” If you are in the habit of fishing for things to buy in response to share price declines, you are already ahead of the supermajority that makes up the investor community. To reach excellence, however, it helps to have money set aside to maximize short-lived opportunities and have specific prices in mind for assets that would constitute great buying opportunities. The attractiveness of Visa’s valuation proved short-lived, and also gave lessons on portfolio management techniques for those that missed it. The silver lining is that you can now prepare for the next similar opportunity while also recognizing there are a lot of other fairly valued high-quality assets out there. In fact, some of the best businesses in the world are trading at fair value right now, and the inability to get a “steal” valuation on them is nothing to lament.
Originally posted 2015-08-24 11:29:43.