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In the investing world there are only two things we can control – what we buy and the price we pay.
We do not control our exit price. Sure, we decide when to sell, but the buyers decide at what price.
We either accept it or we walk away. But that’s control for the buyers, not us. Further, we have absolutely no control over the actual results and dividends of a company we own.
So, with this in mind, we need to ensure we make full use of the factors that we do control, and here I want to focus on the price aspect.
Far too often we ignore this process and chase prices, with the result that we end up overpaying.
The problem with overpaying is that while you now own a great share – I’m assuming that you only buy the awesome ones – you own it at a less-than-great price and this will impact future returns.
Now of course we can spend years debating what a great price is and it is this disagreement on value that leads to a market.
If everyone agreed on what a share should be trading at, then we have no movement and a totally dead market.
Personally, I used a very simple historical price-to-earnings ratio (P/E) methodology to determine a fair price, while much of the industry uses discounted cash flow (DCF) models.
But I am sceptical that the extra complexity of DCF adds value. In fact, I suspect it may increase errors due to its complexity.
However, what is very important to determine is how we’ll decide on a price we’re happy to pay and what we’ll do if a price runs away from us.
A running share price is scary, but it is seldom (never?) a good idea to chase a price.
Rather wait. For example, Long4Life listed to great hype and since it was new with no assets except for cash, it was easy to value.
I just used the cash per share figure as the value and did not want to pay more than a small premium for the shares.
Yet the share was chased up to 838c. Those buying at those levels no doubt regret it right now with the price back below 550c.
Of course, I’ve also had experiences in this regard. Back in around 2010 when Naspers* was trading at R248.50, I quibbled over a few cents.
My system said any price below R280 was a good price but I went on the offer at R248 with sellers at R248.50, and I never got the shares. As a result, I have never owned Naspers.
I really should just have taken the seller’s offer of R248.50 – it was below my fair value price and would have resulted in me owning Naspers today. All I was really trying to do was save 50c!
I will rather always wait for the right price than pay the wrong price. And sure, I may have to wait years – and have done so – but I am exercising the control I have: the price I pay.
What I have learnt over many years of investing is that all shares eventually become cheap on whatever methodology you use and patient people will be rewarded.
It is also worth noting that just because one share is expensive doesn’t mean all shares are. So I am always finding something to buy or add to my portfolio.
Maybe that one stock is expensive, but then you should look for another one you like that is not.
My long-term portfolio consists of 10 to 12 shares and I have never been in a situation where all of them are expensive at the same time and I have nothing to buy. 
*finweek is a publication of Media24, a subsidiary of Naspers.
This article originally appeared in the 16 November edition of finweek. Buy and download the magazine here.
