“If you think about the environment we’ve been in for the past 10 years, purchase price has not mattered.” Marc Rowan, CEO & Director, Apollo Global Management, Q4 2021 Earnings Call
The profit of an investment is often determined by the purchase price since “Price is what you pay; value is what you get”, quips billionaire investors Warren Buffett.
The price of a stock is determined by human characteristics and emotions, such as fear and greed, market tendencies and other factors. All of these things affect the price of a stock, sometimes to a large degree but rarely do they significantly affect its value.
“If you think about the [stock market] environment we’ve been in for the past 10 years, purchase price has not mattered”, said Marc Rowan, CEO & Director, Apollo Global Management. “The more risk you took, the more outrageous, generally the higher the pay off.”
Rowan and Apollo Global Management has consistently followed the investment philosophy that “purchase price matters”. Although, over the past decade in the equity stock markets, their strategy of “patient, value-oriented, disciplined approach to capital deployment” had not been consistently rewarded.
Share Price and Intrinsic Value
“Losing money can happen when you pay a price that doesn’t match the value you get. Look for opportunities to get more value at a lower price.”
Before purchasing a stock, it’s essential to compare the market price of a stock to its fair intrinsic value. When you find a company whose stock’s price is trading lower than the company’s intrinsic value would mark the opportune moment to purchase the company. Since value investors believe that an undervalued market priced stock will eventually climb to reach its fair, or intrinsic, value.
This is a process known as value investing, a type of investing that puts the utmost importance on the valuation of a company and uses various metrics to determine whether the valuation is low, high, or where it should be.
Some of the most important metrics include:
- Price-to-Earnings Ratio (P/E Ratio). The P/E ratio compares the price of a stock to the company’s earnings per share (EPS).
- Price-to-Sales Ratio (P/S Ratio). The P/S ratio compares the price of the stock to the annual sales, or revenue, generated by the company.
- Price-to-Book-Value Ratio (P/B Ratio). Finally, the P/B ratio compares the price of the stock to the net value of assets owned by the company, divided by the number of outstanding shares.
- Price-to-Free-Cash-Flow Ratio (P/FCF Ratio)
Before buying a stock, you must attempt to compute the intrinsic value of the company. If you’re following the value investing strategy, you’ll want to make sure the stocks you buy are undervalued compared to their peers.
Even when following other investing strategies, it’s important to avoid purchasing overvalued stocks because the market has a history of correcting overvaluations with price declines. Because in the long term investing, purchase price does matter.
Growth at a Reasonable Price (GARP)
Overvaluation will ultimately matter. In the short run, stock prices are based on hype and current news. Over the long term, valuations will ultimately matter when the hype declined and the market will correct the price.
When a stock is falling in price, it’s difficult to purchase a stock when it’s out of favor and widely being panned by the crowd.
References:
- https://www.apollo.com/~/media/Files/A/Apollo-V3/documents/apo-q421-earnings-call-transcript.pdf
- https://www.moneycrashers.com/factors-buying-stock-price-value/
- https://www.forbes.com/sites/forbesfinancecouncil/2018/01/04/the-important-differences-between-price-and-value/
Mindset, Discipline, Patience, Opportunity
- It’s about process and being contrarian to current market sentiment and the crowd’s emotion
- Why the hype: Optimistic vs. Pessimistic
When you purchase a stock, you are buying a Piece of a Company, not just a Ticker Symbol.
Every Investment is the Present Value of all Future Cash Flow.
Do you understand how the company makes its money (e.g., revenue, profit and free cash flow)
If the share price is surging; but the company’s corresponding fundamentals correlating and are skyrocketing.
Free Cash Flow – the true life blood for a company :
- Pay down debt
- Buy back stocks
- Pay shareholders’ dividends
- Acquisitions
- Organic growth