Monday, April 20, 2015

Higher Price, But Better Value?

AK's post is a very timely one.

A quick summary:
QAF was trading at 93c last year, with a PE ratio of 16.6X.
Today, QAF traded at $1.14, with a PE ratio of 14.5X, excluding the one off gains.

Recently, I have sold off a stock for 5 years of upfront yield. Very rightly so, people have commented to dig deeper into my rationale and decision for selling. I think such a question should have an answer, at least to myself personally, if I do not want to divulge the real reason publicly. However, I have no qualms about sharing my reason.

Personally, I do not believe in the Efficient Market Hypothesis (EMH). I think behavioral finance ensures that this cannot be true. The current stock price is not the entire wisdom of the market put together, it is the price where all the active buyers and active sellers meet.

I think that stock price is made up on 2 fundamental things, and that is earnings and multiples. The earning of the stock can be determined by many things, and so can the multiple of the stock. I think that the multiple of the stock is less "visible" than the price to most people.

When I sold off my stock, I believe that within the next 5 years, one of 2 things would happen: I would be able to enter back into a valuation lower than I sold off at, or I don't plan on entering back into this stock at all.

If a stock went from $1 to $2, that would imply a 100% capital gain. However, if earnings went from 10c to 50c, valuations would have actually dropped from 10 to 4.

Would I buy the stock with a PE of 4 even though it is now 100% more expensive than the price that I exited?

Would you?

I would.

So, yes, price might keep rising, but if valuations do go down, I would be interested again. It doesn't mean that if price runs away from me, I would be locked out of that stock forever. Price should not be an anchor.

I agree with AK on this: The price doesn't matter, only valuation does.

I have talked about AK's point on this before, and I did say that both the price and valuation are important, but that is assuming that we are not talking about stocks. Whether a stock price is $5 or $0.50 cents is totally irrelevant. If you have $5000 to invest, the only difference is if you end up with 1,000 shares or 10,000 shares.

Price anchoring is dangerous, but I must admit that sometimes certain numbers stick with me and give me a bias. I am working on it and trying not to let such things affect me. They shouldn't.


  1. 5 years of upfront yield at current dividend payout but dividend might go up, then holding on may be better if your original price had good MOS against fair value.
    Of course, sell is also good if timing is right at top of market and build up war chest to use when market comes own.
    I don't think my timing is so good - so only sell those with poor MOS and those that are for pure capital gain with no dividends.

    1. Hi Anon,

      Yup, agreed about good MOS against fair value. Those are always good to hold, lets you enjoy mental peace of mind while still having possibility of further upside.

      I don't think my timing is good too, but such violent moves to the upside are usually not sustainable imo, which is why I decided to quit while ahead.


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