The management team? Growth prospects? Profitability? “No, no, and no,” answers Nick Maggiulli of the Of Dollars and Data blog. Rather, when it comes to investing, he says the most important piece of information is the price you pay.
“That’s right,” Maggiulli explains in a blog post. “Even with bad management, terrible growth, and bad profitability, there exists some price, possibly a negative price, at which every asset would be a good investment. All the other aspects of an investment will fail you if you pay the wrong price.”
But don’t just take his word for it. Berkshire Hathaway’s BRK.A, +0.45% Warren Buffett once summed it up like this: “Price is my due diligence.”
The simple, and rather obvious, math shows that higher purchase prices imply lower returns. But it might surprise you how much it really matters over the long-term. Just take a look at this animated graphic charting the course of every 30-year period for the U.S. stock market from 1881 and onward.
Of course, this trend leads can be dangerous for those emboldened to attempt to time the market and catch a falling knife.
“Despite all of the evidence,” Maggiulli said, “I still think you should mostly ignore this advice if you are an average retail investor. Why? Buying when things are cheap requires you to time the market to some extent.”
He explained the issues in that approach with this quip from Meb Faber, fund manager at Cambria Investments: “What do you call a market that is down 90%? That’s a market that was down 80%, then proceeded to go down 50% more.”
So while price is everything, Maggiulli urges investors to avoid the allure of a seemingly low valuation and stick to these two basic approaches:
1) Dollar cost average. “While this is not optimal mathematically, since you sometimes buy assets at inflated valuations, behaviorally it is by far the best solution I know for the average retail investor.”
2) Buy value ETFs, such as the Vanguard Value ETF VTV, -0.15% or the iShares Core U.S. Value ETF IUSV, -0.18% . Maggiullis says this is a great way to get some exposure to value plays, though he cautions against adding too much because of their tendency to go through stretches of underperformance.
Besides, the Dow DJIA, -0.13% has climbed back to within 1,000 points of its all-time high — not exactly the ideal climate for novice bargain hunters.