How To Avoid Turning A Good Investment Into A Poor One

A conversation among investors was interesting to hear.

Sarah asked Joe how his stocks were doing. Joe talked about the five new stocks he purchased. All were well-known companies. He had owned them for six months. But he was disappointed in their returns. The five had dropped in price. Some more than others.  

Sarah said the stocks’ poor returns were normal. They were not growth companies. The companies were too safe to have above-average returns. She assured him the stocks would recover. But his average stock returns would still be around 6% to 8%.  

I have never believed in the Growth and Value differences. So I thought Sarah’s explanation was incorrect. I valued several of the companies Joe had purchased.  

By my calculations, the stocks Joe purchased were already overvalued by 25% to 30%. This eliminated any margin of safety for Joe. His downside could be significant. And even though the companies were well known and solid, the price Joe paid added significant risk to his investments. The price we pay for stocks is a big deal.

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