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Wise Investor Virtue 3: Thrift

Investor Virtue #3: Thrift

Note: This blog is part of an ongoing series on the Five Virtues of a Wise Investor. You can read here about #1: Curiosity and #2: Courage.

 I talk a lot with clients about the value of being a thrifty investor. By that I mean getting great value for what you buy. However, I find that it’s easy for people to confuse thrift with frugality. In my mind, these are two very different things.

I define frugal as being cheap for cheap’s sake. On the other hand, being thrifty means spending money wisely and ending up with a good product. Take Q-tips®, for example. I’m a thrifty shopper. At the same time, I’ve decided I won’t buy generic, no-frills cotton swabs anymore. They seem to break easily, leaving the plastic stick poking uncomfortably into my skin. I stick with Q-tips* and am happy to stock up when they’re on sale.

Thrifty investors approach the financial market the same way: They expect to be well compensated for the money they’re investing. They’re not simply looking for the cheapest possible stocks to fill up their portfolio.

Some stocks are cheap for a reason

Like generic cotton swabs, certain stocks are cheap because they ought to be cheap. There may be something wrong with the underlying company. Thrifty investors avoid those stocks.

Instead, wise investors look for investments that are selling at bargain rates because other investors have overlooked them for some reason. The market has temporarily failed to see the stock’s inherent value. Thrifty investors swoop in and buy these stocks at low prices.

About the value investing strategy

“Value investing” is the umbrella term for the overall strategy of buying stocks that are selling at low prices compared to the overall market. We have 90 years of pretty good data to show how well value investing works.**

Why do stocks sometimes sell at below their true value?

It’s natural for stock prices to cycle above and below their true value over time. Sometimes prices will dip to well below true value, but over time, those prices tend to swing back up.

That’s how and why thrifty investors may be able to make the money in value investing: We buy stocks low, wait for them to increase in value, then sell them at a higher price. It’s the oldest maxim in the investing guidebook: Buy low, sell high.

By the way, we can always determine a stock’s true value via a number of calculations, including book value relative to price, earnings relative to price, or a combination of computations.

Being a thrifty investor takes discipline

Following a value-investing strategy isn’t always easy. You may have to wait through long periods of time when value investing is out of favor. We’re actually in one of those out-of-favor periods right now. Value investing has underperformed dramatically since about 2010.

What this means: You may be doing a great job of buying undervalued stocks at bargain prices, but it’s going to take a while for the market to show you that your picks are good and reward you with higher prices. So sit tight, keep buying quality stocks (the equivalent of name-brand Q-tips) at good prices, and wait for your eventual payoff.

In other words, have patience. And that, actually, is the focus of my next installment in my series about the five virtues of great investing.

* I’m not being financially compensated to promote Q-tips. They just happen to work well for me.

 **Source: Dimensional, Fund Advisors for the period 1927 to 2014.

 

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

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