Some random thoughts on investing and life

This blog has been around for 10 years and I have written many posts on various topics. Thanks to all of you who have followed and kept returning to this post to show your support. I appreciate it. 

Now, as many of you know, sometimes it is easy to write a post on a single idea and elaborate on that idea; sometimes it is difficult to expand on one particular idea.

Today’s post is the latter case because I am finding it hard to write a post on a single idea and expand on that idea to make the post over 1,500 words. Instead, I’ve decided to write another post called Random Thoughts to cover various random topics. 

The ups and downs of the stock market 

I don’t understand why people freak out about the ups and downs of the stock market. It’s OK for stocks to go up. And it’s OK for stocks to go down. 

The problem, I think, lies in the two opposite ends of the spectrum.

  1. Some people believe the stock market should only go up.  Then on the down days, they think that is the end of the world and the next recession is around the corner. 
  2. Some people on the opposite end of the spectrum believe the stock market is completely randomized and overall it’s a losing game to play. So they think the market is out of its mind when it goes on a positive tear.

The stock market will go up and down, that’s the nature of the market. Over the long term, the stock market tends to go up around 10% a year. Several things in life are guaranteed to go up over time – inflation, the real gross domestic product (GDP), and finally the stock market. If these things don’t go up over time, we’d have a big financial problem on our hands (taxes also go up over time, unfortunately).

On a related note, queue the famous quote – “in the short run, the stock market is a voting machine; in the long run, it’s a weighing machine.”

This is exactly why you’re better off staying invested and having time in the market rather than trying to time the market. 

Trying to be rich by timing the market is a fool’s game. Just don’t do it.

Focusing too much on the P/E ratio

When determining whether to invest in a stock or not, many investors use the P/E ratio alone to make that critical decision.

Yes, the P/E ratio is popular and easy to calculate, but it has many shortcomings.

First, the P/E ratio is typically backward looking, so it doesn’t factor in future earnings growth. Therefore, a stock with potentially explosive growth, like Nvidia for example, will have a much higher P/E ratio than a stock with a lower potential growth.  

Second, different sectors generally will have different average P/E ratios. Stocks in the tech sector typically have higher P/E ratios due to the potential higher growth; stocks in the consumer staples sector typically have higher P/E ratios due to safer and lower volatility; stocks in the energy sector typically have lower P/E ratios in comparison due to the cyclical nature. Therefore, it’s unfair to compare P/E ratio across different sectors.

Someone told me a while ago that another way to see the P/E ratio is that it is equal to how many years it would take you to get back your initial investment. Therefore, the smaller the P/E ratio, the quicker you will get your money back.  

On the surface, it makes sense. A stock with a P/E ratio of 5 is cheap, so it should grow faster than a stock with a P/E ratio of 40, and you’d get your initial investment back quicker.  

In reality, that’s a complete misconception.

The P/E ratio is the stock price divided by the earnings per share. Just because the P/E ratio of Apple is 27, it doesn’t mean it will take you 27 years to get your initial investment back because earnings almost always never stay the same over time, so the P/E ratio will change over time. In fact, if it takes investors 27 years to get their initial investment back by investing in Apple, nobody would be investing in Apple. Similarly, at the time of writing, Nvidia has a P/E ratio of 77, it certainly doesn’t mean it’d take you 77 years to get your initial investment back! 

The P/E ratio simply tells you how much you’re paying for every dollar of earnings from that company, nothing more. It’s just a ratio for evaluating stocks but it should never be the only ratio you use to determine whether to buy a stock or not.

The PEG ratio, the price-to-book ratio, the debt-to-equity ratio, and return on equity (ROE) are other great valuation metrics to use. 

But more often than not, it’s about taking a step back and looking at the big picture – does the company produce products that people rely on every day? Is it difficult to switch to a similar product? Does the company have competitive advantages over its competition? Does the company have a wide moat? Can the company continue to innovate over time? 

Don’t get caught up in the metrics, look at the big picture.

Why I continue to like Costco 

We own Costco stock and it has done well over time (one of the multi-bagger stocks we own in our dividend portfolio). One of my regrets? I wish we had purchased more shares years ago. But it’s OK and I’m totally happy to average up our cost basis for Costco whenever we purchase more shares. 

Every single time I go to Costco, it is always packed. Costco continues to have great customer retention with a US and Canada membership renewal rate of over 92% and a global membership renewal rate of over 90%.

People like to shop at Costco because the warehouse offers good value (us included,) Costco continues to be the price leader on many items that I compared). It is a well-known fact that Costco sells products at very low margins and makes profits from the annual membership. This is a completely different business model than other retailers like Walmart, Target, and Loblaws. 

People have been speculating that Costco will increase its membership fees soon and Costco CFO, Richard Galanti, has commented that it is a matter of when, not if Costco will increase the membership fees.

As a shareholder, it’s nice to see that Costco’s customers are so loyal and that Costco is planning to increase its membership fees to further increase its revenues and profitability. Costco has also been adding new stores to extend its reach around the globe, especially in China. Adding more stores in China will help Costco to grow its total membership.

Ever wonder why you always seemed to end up with more items coming out of a Costco warehouse than you intended to? 

One thing Costco does very well is keeping shoppers in the store – Costco regularly moves products around their warehouse, forcing shoppers to walk around in the store to find things they’re looking for, then unconsciously pick up more items than they intended to purchase.

Another well-known fact is that Costco has kept its hot dog price the same for many years. It’s a cost loser for Costco, but Costco refuses to raise hot dog prices because the management believes hot dogs are one of the things bringing customers into the warehouses. Interestingly, Costco has been testing out different food court items. For example, Costco recently replaced churro with freshly baked chocolate chip cookies. It is also testing a fully operated sushi offering in Issaquah, Washington, just across the street from its headquarters. 

We purchased Costco shares years ago after a small correction, and the PE ratio was above 30. It was anything but cheap when we purchased it. But since then the share price has continued to climb. I do not doubt that Costco’s share price will continue to rise in the future. 

Yes, Costco stock may be overvalued at the time of writing. While Costco stock may encounter small corrections here and there, regardless of what the corrections are, I truly believe it will always be considered overvalued from the traditional P/E ratio sense. 

Looking ahead… living abroad 

I have written about our desire to live in Taiwan and Denmark for about two years in each country. Mrs. T and I have talked a lot about it and even went as far as tentatively setting a year on when we wanted to move. That year happened to be 2020 and as most people would remember… a thing called COVID happened that year and our “plan” went kaput. 

We still would love to move to Taiwan and live there for two years at some point. This would give an excellent opportunity for both kids and Mrs. T to learn Mandarin. It would also provide an excellent learning opportunity for both kids. The question is – when is the right time? Unfortunately, there’s no right time. We probably just need to set a date and force ourselves to get into gear. Because if we don’t, we’ll probably just continue our comfortable lives here in Metro Vancouver (not that there’s anything wrong with that either…). 

Yes, I do realize there are some geopolitical tensions between Taiwan and China, but that has been going on for years. Most Taiwanese, myself included, do not believe anything is about to change.

Since my work has an office in Taiwan, perhaps one option is to ask my work to relocate me over there for two years. I’m not sure what the reasons would be for work to relocate me to Taiwan but maybe I can start planting the idea… over the years I have learned it doesn’t hurt to ask. The worst thing to happen is you get a no answer. If you don’t ask, you’ll never get it!

Moving to Denmark, on the other hand, is more problematic for me because I can’t get a Danish passport (both kids and Mrs. T do). Danish immigration laws are quite restrictive as there’s no such thing as a digital nomad visa in Denmark. My work doesn’t have an office in Denmark so getting relocated there for work simply isn’t an option. One option is to have Mrs. T “sponsor” me. Another option is for me to find a job in Denmark and have the company sponsor me. Both options, however, require a lengthy and complicated application and approval process.

Needless to say, we need to do more research and figure out our options to realize this living abroad dream…having said that, I’m glad we are working toward financial independence and living off dividends because being FI will give us lots of options in life!  

Share on:

10 thoughts on “Some random thoughts on investing and life”

  1. Excellent column Bob. I especially like your direct views about time in the market is what is important, and not timing the market. Very clear and good advice!

    Have a great summer!


  2. I can see investors nearing or during their retirement have legitimate concerns with the up and down of the stock market. In other words, all depend on the individuals’ subjective and objective risk tolerance.


Leave a Comment


This site uses Akismet to reduce spam. Learn how your comment data is processed.