Quick Take: Why the buy price of a stock matters

If you want to ride your winners, you got to ensure that you enter at the right price.
By Morningstar |  25-09-22 | 

Very, very few businesses have permanent moats.

There are a few exceptions, but businesses don’t have permanent moats.

The best-performing stock in the world over the last 90 years has been Philip Morris. A cigarette company, despite cigarette smoking having gone down. The return has been the best because the dividends that the company throws out, when reinvested, gives you more gains. It's the free cash flow and dividends that have been particularly good in terms of returns.

Because it is not obvious which companies will outperform, don’t underestimate diversification.

The Nifty 50 stocks of the U.S. stock market were decimated. But three did very well - Coca Cola, McDonald's and Walmart; the latter being a superstar stock.

As long as there's diversification among high-quality companies, the risk of permanent capital impairment is minimal. The winners make up for a number of losers.

This is why starting valuations matter.

It's very important that you buy a stock cheap in order to make returns over the subsequent 5 or 10 years.

If you bought Infosys at the peak of the bull run in 2000, you didn't make money for the next 10 years. If you bought Wipro at the peak valuation in 2000, when Azim Premji had become the second richest individual in the world, you haven't made money in that stock till today (September 2019). If you bought Hindustan Lever in 2003-2004, you would not have have made money on it for a decade.

You cannot pay any price for any stock, no matter how good. No matter how great the company is. It's amazing how investors forget that during the heat of a bull run. There is an inverse relationship between the P/E ratio and the subsequent long-term performance.

But once you get hold of a good stock, you can't cash out with a Rs 10 profit or a Rs 20 profit. We saw Infosys go from a Rs 30 crore market cap to almost Rs 1 lakh crore market cap during this bull run. Learn to ride your winners.

The above is an extract from RAMESH DAMANI's 7 stock investing lessons.

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ninan joseph
Oct 5 2022 02:24 PM
 Has anyone factchecked what is written

If you bought Infosys at the peak of the bull run in 2000, you didn't make money for the next 10 years.

In 2006 Infosys was at 180 and it peaked to 350 in 2010 - Did I not make money? It almost doubled.

Same with Wipro - In 2006 wipro was in the range of 119 to peaked to 180.

I could only get charts from 2006. I am sure if I check what the rate was in 2000 it should have been much lower.

What is the point you guys are trying to make. Anyone buying any of the above stock has only made money irrespective at what level his has bought. Just check the above two stocks at the current value and do it after adjusting for corporate actions. There is nothing called at the current value. If the value is high, it will get adjusted with value. If the extract is from Ramesh Damani then he would not have bought a single stock. All he would be doing is doing the rounds on small cap and expect a lottery hit on them.

If anyone is a serious investor, he will not just check the charts of the stock he wants to buy and see where it was 10 years ago and decide. Once you enter then buy on dips and accumulate. This is sensible instead of saying, sit on the fence and wait and wait and wait for the stock to fall. Yes it might if you were in 2020 of march. But that fall, no man worth his salt will buy because at them all wanted was exist and run - People who bought at 2020 march was the real winners. To do this you should have asset allocation in place so that you can buy when the stock crashes.
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