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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.

 

Fisher wrote:

“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?

 

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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.

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35 Comments

  • Reply
    Henry - Living At Home
    November 18, 2014 at 6:16 pm

    That is an amazing book! I think return on capital play an important role in determining your total return. Over the long term, a company can only grow as much as its ROC, it acts as a speed limit on growth. And assuming you don’t pay an outrageous price, how you do is correlated to ROC.

    • Reply
      Tawcan
      November 18, 2014 at 6:56 pm

      Hi Henry,

      ROC is very important. It shows how good the company is in re-investing its capitals. If a company has a ROC of 25% and another one has a ROC of 5%, you should always pick the 25%.

  • Reply
    My Dividend Pipelein
    November 18, 2014 at 6:51 pm

    Tawcan,

    We have a saying at work….Don’t step on dollars to pick up dimes. Day traders worry about dimes while investors focus on creating long term wealth.

    MDP

    • Reply
      Tawcan
      November 18, 2014 at 7:30 pm

      Hi MDP,

      Exactly! Long term investors like us shouldn’t worry about dimes.

  • Reply
    Dividend Mantra
    November 18, 2014 at 7:28 pm

    Tawcan,

    That book comes highly recommended by Buffett himself. I’ll have to check it out sometime. I hear it’s timeless.

    I don’t put in limit orders. If I see a high-quality stock trading for an attractive price and I have the capital, I put in the order and buy it on the spot. I don’t worry about if it might be trading for 20 cents less after the purchase or whatever. 30 years from now it won’t matter if I paid $40 or $40.50 for a stock.

    Great reminder to not miss the forest for the trees.

    Best regards!

    • Reply
      Tawcan
      November 18, 2014 at 10:28 pm

      Hi Dividend Mantra,

      Exactly if you think the stock is high quality and you’ll be owning it for years, why care about a few dollars difference?

  • Reply
    writing2reality
    November 18, 2014 at 7:37 pm

    Guilty as charged as well… I do this to save a buck or two, when in reality just investing and moving on will be simpler, less stressful, and take some of the emotion out of buying. Certainly a good reminder as I look to make another move this month.

    • Reply
      Tawcan
      November 18, 2014 at 10:29 pm

      Hi W2R,

      Like I said, I’m guilty for doing the same thing before as well. It’s important to look investing from a long term point of view.

  • Reply
    Roadmap2Retire
    November 18, 2014 at 7:49 pm

    Great point, Tawcan. Ive lost many investment opportunities trying to wait for a certain dollar amount before buying. I have to keep reminding myself that its a silly notion to carry…but yet I do it. Last month, I missed out on adding JNJ to my portfolio as I kept waiting for it drop to the magical 3% yield mark at $93. The stock fell down to $95 and bounced back up….and now I regret it.

    I will have to add this to my reading list. Thanks for the recommendation.

    R2R

    • Reply
      Tawcan
      November 18, 2014 at 10:33 pm

      Hi R2R,

      I’ve lost some investment opportunities in the past as well. I’ll definitely change my approach moving forward.

      Cheers.

  • Reply
    Special Agent Dividend
    November 18, 2014 at 10:36 pm

    Thanks for sharing that book. I’ll have to check it out. Also, I’m prone to doing this as well. I missed out on KMI a month or so ago by doing it. It came within like .25 of my limit order and I never increased it to make the move. Instead it has climbed back up and I still haven’t bought. Oh well, lesson learned. Thanks again for sharing!

    • Reply
      Tawcan
      November 19, 2014 at 9:48 am

      Hi Special Agent Dividend,

      Hopefully you learned from the lesson. KMI is a solid company to invest in.

  • Reply
    Huw
    November 18, 2014 at 11:26 pm

    Hi Tawcan,

    I have to confess to doing this too. My most recent example was a few weeks ago too. I put an order in for BHP Billiton and the price ended up going up. I ended up buying Admiral as their price went below a threshold I had for them. I ended up buying them at the price because I didn’t want the same thing to happen.

    I think there are a few reasons why I’ve done it before – to squeezing out extra value, greed, stubbornness, I don’t have time to put the trade in during work hours and end up setting up a limit order too low (for reasons stated).

    I will continue to use limit orders because they have their place for someone like me that doesn’t have constant access to computers during the day, but your post is a healthy reminder on how ‘low’ I should consider setting them.
    It’s not worth saving £50 for $50k is it!

    Thanks for sharing. The book sounds great.
    Huw

    • Reply
      Tawcan
      November 19, 2014 at 9:51 am

      Hi Huw,

      I have been guilty of doing the same too. I, too, was trying to squeeze out extra value out of the purchase. Take AAPL for example, it makes no sense to not pull the trigger say $300 and wait for the price to dip below $280 and end up not owning the stock at all.

  • Reply
    Jeff
    November 19, 2014 at 4:43 am

    An excellent point Tawcan. I am one of those people who put in a buy limit and refuse to budge on my set price no matter what. Maybe it is time I stop worrying about chump change and start looking at the bigger picture. I will definitely give the book a read!

    • Reply
      Tawcan
      November 19, 2014 at 9:51 am

      Hi Jeff,

      When I want to buy a stock sometimes I put a limit order but I tend to increase my price just so I get it. Maybe I should just do a market order from now on. It’s a great book, I’d highly recommend it.

  • Reply
    Liquid
    November 19, 2014 at 6:56 pm

    “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price” ~ Warren Buffett

    • Reply
      Tawcan
      November 20, 2014 at 11:42 am

      Great point Liquid!

  • Reply
    Weekend Reading – November 20, 2014
    November 21, 2014 at 1:06 pm

    […] Don’t quibble over eighths and quarters Tawcan reminded us to not worry about trying to get a stock at 2% or 3% cheaper if we might potentially miss out on the 100% gain. It won’t matter if you paid $40 or $42 for a stock 10 or 20 years from now. However, that doesn’t mean you should overpay, either. Focus on quality and value, but don’t obsess over every penny. If a great stock is trading for a solid price, pull the trigger. […]

  • Reply
    FrugalitytoFinancialFreedom
    November 21, 2014 at 8:07 pm

    Tawcan, that was a great advice, and like you I am guilty of it too. I would add that book to my reading list. Thanks for sharing!
    FFF

    • Reply
      Tawcan
      November 22, 2014 at 10:31 pm

      Hi FFF,

      Definitely read the book, highly recommend it.

  • Reply
    Geblin
    November 22, 2014 at 4:32 am

    HI Tawcan,

    I just finished reading the book, and I have to agree with Fisher. It doesn’t make any sense. A few saved dollars won’t make up the difference when you miss out the on a 100+ % gain.

    Cheers,
    G

    • Reply
      Tawcan
      November 22, 2014 at 10:32 pm

      Hi Geblin,

      Totally, Fisher is a genius when it comes to investing concept.

  • Reply
    Pullingmyselfup
    November 22, 2014 at 10:11 am

    I’ll use limit orders if its a small thinly traded company because with low volume you can get some really bad fills.
    But for the most part its market orders. I really love the quote from the book you put and its very applicable. I’d have missed out on a lot of great profit if I was worried about nickels and dimes on share price.

    • Reply
      Tawcan
      November 22, 2014 at 10:34 pm

      Limit orders for smaller companies do make sense from time to time so you avoid the sudden spikes.

  • Reply
    just
    November 22, 2014 at 12:25 pm

    Tawcan,
    I believe you should never use market orders. As an investor, I want to be in control at all time. I lose this with a market order. I use the “ask” part of the quote and use that as my limit price. If I really want the stock I may add a penny or two to my bid, but nothing more.
    Regards
    Just

    • Reply
      Tawcan
      November 22, 2014 at 10:34 pm

      Hi Just,

      I’ve used market orders from time to time and had great results. If you’ve decided to purchase the stock, why would a dollar or two make a difference?

  • Reply
    Dividend Diplomats
    November 22, 2014 at 1:02 pm

    Sounds like I need to add this book to my list. It is a great lesson. Too often we are focused on catching the stock slightly lower to maximize or gain. While it may make sense for a short term investor, the difference is minimal for buy and hold investors (as you demonstrated in the article). I am going through this now as I am trying to figure out whether to invest in IBM or CVX. Both are great stocks, so I might as well pick one to invest in now. While one could decrease, I am taking the risk that they both may appreciate and I’ll miss our on this great opportunity. So I am t waiting much longer and I’m pulling the trigger this week. Thanks for the lesson/reminder!

    Keep up the great work and keep telling us about the great books you have read!

    Bert, one of the Dividend Diplomats

    • Reply
      Tawcan
      November 22, 2014 at 10:35 pm

      Hi Bert,

      Definitely add the book to your reading list. I totally understand why Warren Buffet recommends this book.

  • Reply
    Prairie Eco Thrifter
    November 22, 2014 at 2:40 pm

    My friend has decided to try to get into day trading even though she and her family have never invested a cent otherwise. I think it would be far better to practice what you’ve laid out here – buying for the long term and changing your attitudes toward investing – before getting into the nitpicky and risky day trading.

    • Reply
      Tawcan
      November 22, 2014 at 10:38 pm

      Hi Prairie Eco Thrifter,

      Day trading is never a good idea. You could win big or lose big.

  • Reply
    Investing Pursuits
    November 22, 2014 at 8:49 pm

    I use limit orders mostly as I have no access to the markets when they are open as I am at work and have no way to see market action at work. If I am comfortable with the price of the company’s stock I will put in a limit order slightly lower than the price of the stock. If I want to own a stock but it is trading higher for what I am willing pay for it, I will be in a limit order to buy it like $2.00 below and keep the limit order for about 7-10 days.

    I started investing in my mid 30’s so I follow this way to make sure I get the yield I want. If I put in a market order the night before, the stock could open like 5 % higher on some news.

    If I had access to my brokerage account when the markets are open, I would definitely use market orders. I would check the current price of the stock and it is good, I would do a market order for sure as I would be filled instantly right near the price I know .

  • Reply
    DividendDreamer
    November 22, 2014 at 10:26 pm

    I do exactly what you mention almost every day. I just cannot bring myself to just buy with very dime. I invest the dividends back at basically the going price, but any new cash is only spent at the price I feel is conducive to a good deal to me. I just cannot let go of this process. It certainly would be less time consuming to just buy at a market price, but I only use limit orders and I do not anticipate a change. As a matter of fact, besides automatic reinvestment of dividends, I have never used a market order. Lots of deals have gone right by me because the order was not filled, but that is what happens when limit orders are used, and I am OK with that. Great article.

    Keep cranking,

    Robert the DividendDreamer

  • Reply
    BeSmartRich
    February 16, 2015 at 6:17 am

    Thanks for leading me to this posting. I am guilty as charged although I still see limit order is an excellent tool for investors with target prices in mind.

    BeSmartRich

  • Reply
    DividendDiatribes
    February 4, 2016 at 3:37 pm

    As BeSmartRich said I am also “guilty as charged.” Thank you for leading me to another book to read too!

    JT

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