Don’t quibble over eighths and quarters
I have been reading “Common Stocks and Uncommon Profits” by Philip A. Fisher. This book is considered as one of the must read investment books and Warren Buffett has recommended it. In the book Fisher talked about the fifteen points to look for in a common stock and provided profound of insights to how to determine whether to invest in a company stock or not. One of things that caught my eyes was Fisher’s idea that you shouldn’t quibble over eighths and quarters on the stock price.
“A little over twenty years ago, a gentleman who is most respects has demonstrated a higher order of investment ability wanted to buy one hundred shares of a stock listed on the New York Stock Exchange. On the day he decided to buy, the stock closed at 35 1/2. On the following day it sold repeatedly at that price. But this gentleman would not pay 35 1/2. He decided he might as well save fifty dollars. He put his order in at 35. He refused to raise it. The stock never again sold at 35. Today, almost twenty-five years later, the stock appears to have a particularly bright future. As a result of the stock dividends and splits that have occurred in the intervening years, it is now selling at over 500.
In an attempt to save fifty dollars, this investor failed to make at least $46,500…. if the stock seems the right one and the price seems reasonable attractive at current level, buy “at the market.” The extra eighth or quarter, or half point that may be paid is insignificant compared to the profit that will be missed if the stock is not obtained. Should the stock not have this sort of long-range potential, I believe the investor should not have decided to buy it in the first place…”
I have certainly been guilty of doing this, so it was interesting to hear what Fisher thought on this topic. Fisher was not a fan of placing a buy limit order and hoping the stock price would drop to your order price before it goes up again. Why would you want to save a few dollars and risk in not adding a great company to your portfolio?
Since I’m investing in dividend growth stocks, an eighth or quarter in purchase price should not influence whether I buy the stock or not. It’s important to do my homework prior to making any purchase. If I make sure the company meets my buying criteria like low P/E ratio, low payout ratio, consistent dividend growing history, low PEG ratio, and has competitive edges (i.e. wide moat), then I should not worry about saving a few dollars in the short term. Over a long time period like 10 or 20 years, if the the company is growing consistently, the stock price will almost always increase. This will make up of the few dollars I tried to save while bidding for the stock. If you’re buying dividend stocks, the future dividends will also compensate the lost dollar amount as well.
Always evaluate potential stock investment from a long term point of view, after all, I’m not a day trader and neither should you.