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What price to pay when investing?

Asset allocation.PNG

 

Having decided what you want to buy (see article here) the next as important step is to determine the price we want to pay.

 

What to buy and what price to pay are the only two aspects we can control when investing for the long-term so we need to make sure we have the right processes in place.

 

The price to pay can be as complicated as a Discounted Cash Flow (DCF) formula but I like to keep things simple.

 

I chart the PE of the share I like over the last seven years. Seven years is long enough to be a typical economic cycle and research suggests that using more data would not increase the effectiveness of the research.

 

With the PE charted I then work out the average PE for the period and I then want to buy the share when the forward PE is below the seven-year average. The forward PE is from the Standard Online Share Trading platform suing the consensus earnings per share for the next financial year but divided into the current share price. The risk is earnings are lower, but no investing is without risk.

 

What is also very important is that just because this is a price we like does not mean the share can’t go lower. Of course it can. But as a long-term investor that doesn’t stress me, I now have quality and at a price I like. Further I stagger my entries, so for example if I want to buy a stock at say 8000c I will have a bid in at that level, but will also add another bid 3% lower, another 3% lower, 9% lower and 12% lower. Further as new results come out the price I am prepared to pay will be changing, so I update the data ever six months.

 

Lastly if the stock is well above my ideal price I just wait. Investing is about patience and while one stock may be expensive the chances are that another is within my price range.

 

The video link below details how I get the data and create the charts using the Standard Online Share Trading platform. 

 

http://s3.amazonaws.com/OST/StandardOST_What_Price_to_pay_Jul2015.wmv  

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