I always emphasize buying quality companies with the stock at its fair price or lower. This doesn’t mean that I won’t pay a small premium for a great company selling above fair value. But, the truth is Price Is Everything when it comes to stock purchases.
A Few Basics for Stock Selection
I like to start any discussion of fair price with a quick review of stock choice.
Always treat investing as your personal income producing business. If you were starting a business, you would definitely want to make sure that it would grow income and profits over time.
Develop your own business plan. Write a short, concise plan that serves as your investing road map.
Another fundamental is to invest in excellent businesses, just as if you were buying the entire company outright. Learn to summarize in your own words the reasons the company is good.
- How does the company make its money?
- What hard to match advantages does it have over similar competitors?
- Does it have a brand name(s) or product lines that stand out?
- Consider licenses, trademarks, patents or copyrights that are highly valued?
- Is the corporate management team strong, competitive and shareholder friendly?
A third principle is to buy stock (business) with as if never selling. Assess the company with a “hold forever” frame of mind.
And finally, buy stock in a company at its fair share price or lower. Buy on sale.
Fair Price Is Important
It’s important to know that you’re buying the growth potential of current and future earnings. Paying fair market value or less for a stock for predictable earnings provides a margin of safety.
Following the fair price trail, let’s define Fair Price as a share price that will give you the highest growth of compound annual returns.
Compound Annual Growth Rate (CAGR) is a rate of growth that will move you from your beginning investment value to a future desired value based on the investment compounding over time.
Price, then, is what you’re willing to pay for the return you want. Price considers predictable earnings and earnings growth.
Since we’re paying for current and future earnings growth, the predictability of earnings growth is important.
Price is everything in determining the highest growth of compound annual returns.