It is often said that investors don’t care about the buy price of a share, but traders do. This is an interesting sentence, because of course everyone cares what price they pay for shares. Today I thought I’d have a go at explaining the meaning behind this adage.
Clearly, investors care about their buy price, because if the buy price is too high, the stock isn’t worth buying. The difference comes down behaviour around the small price fluctuations. A trader might try to buy at the bottom of the range of fluctuation, then sell on the higher ends of the current valuation range. For example, if a stock is worth between $1.20 and $1.30, a trader might buy at $1.20, then sell at $1.30. Their profit is small, but they are able to repeat this several times a day to make a large profit.
On the other hand, an investor doesn’t care so much about the small fluctuations. They would prefer to buy at $1.20, but would be willing to buy at $1.30. They may then later sell at $4.00 some years later, so the $0.10 difference in buy price might only equate to a few percent difference in the final value of their stock when they sell.
While this might be thousands of dollars difference for the investor, this is the opportunity cost of being able to invest. I’m sure many investors will have a story where they have missed out on buying a stock due to chasing the price up because they were trying to get in at the lowest price.
Because of this, an investor is more likely to be willing to pay a higher price for stocks than a trader; hence the adage that investors don’t care about their buy price, but traders do.
The take-away from this is that if you are an investor, so long as you buy at a price that you think the stock is worth, it doesn’t matter if the share price drops after your purchase, so long as the company performs as you expected it to. That said, the possible exception to this is if your exit strategy relates to market sentiment, rather than dividends (one of the reasons that I don’t like Multiples of Revenue, and Comparables Market valuations).
The good thing about this type of investing is that (barring black swan events and times of raging bulls where everything’s overpriced for extended periods of time) investors should be able to sleep better at night because no matter what happens to the price, you know that you didn’t pay too much if you bought at a price where you saw value. I think this is an important factor, especially if you are relying on dividend income for your retirement or lifestyle.