Blog 7 - The Art of the Buy
- Jay Mason
- Jan 8, 2024
- 7 min read
"Your one chance to create value is when you buy. The rest is up to the market." — Warren B.
After selecting a quality, risk-measured, compounding growth stock, the next step is a timely—and preferably discounted—buy-in. Investing success, essentially, starts with a built-in advantage of buying a great asset at a better than fair price.
According to Warren, the buy-in is the single most valuable opportunity to create value. Thereafter, performance is in the hands of Mr. Market. This blog introduces several methods to effectively deploy the buy-in process.
Fear vs. Greed vs. Reality
Underlying all good investments are fundamental mathematics around which an asset's intrinsic value fluctuates. Yet valuations can gyrate wildly due to human behavior. For those who remain calm, this presents value-creating opportunities.
"Kill your pride. Turn your fear into a weapon. It's not the devil at your door. It's just your shadow on the floor."— Drake Livingstone Jr., "Shadow"
As Figure 1 shows, even in the best years, the range between best and worst price points can approach 50%. Volatility is the norm. The very best investment opportunities will be signaled by those butterflies of fear in your stomach.
Figure 1 Source: JPMorgan
What to Buy?
Warren didn't mean for investors to wait forever for the perfect pitch. His analogy meant only swing when the probability of success is highest. This entails two factors:
1. An Eye for Quality
Enduring moat: Stable gross margins >40% (pricing power) and ROICs >15% (good resource allocation)
Healthy balance sheets: Moderate debt and good interest/dividend coverage
Respected & motivated leadership: Regular earnings beats, meaningful ownership
2. Patience for a Reasonable Discount
Even with the worst timing, when you buy quality assets, eventually the tide turns favorable. Time in the markets is the investing genius.
"Buy a stock because you want to own the company. Not because you want the shares to rise."— Warren Buffett
At What Valuation?
A stock's current price reflects the present value of all future net cash flows (plus or minus market sentiment). The P/E ratio is the price investors will pay for each $1 of net earnings, influenced by three factors:
Rate of earnings growth
Rate of dividend growth
Changes in P/E multiple (investor sentiment)
P/E Ebbs and Flows
Figure 2 shows 110 years of S&P 500 performance (1909-2021). While fundamental earnings growth (green) and dividends (blue) were prominent contributors, positive (yellow) and negative (dark orange) investor sentiments clearly impacted alternating periods—sometimes distorted for extended timeframes.
Figure 2 Source: Crestmont Research
Triangulation: Four Quick Comparisons
Before you pull the trigger on that next stock purchase, consider triangulating the current price across these 4 parameters:
1. The Market
Check if the market is overpriced. The long-term average is a P/E of 17x. If the market exceeds this trend, an eventual pullback would render deeper stock discounts. Be mindful of macro valuation when pondering your next purchase.
2. The Industry
Compare a stock's P/E to its industry average. Any significant difference warrants investigation. Is a higher P/E justified by strategic advantages? If at a discount, has the company incurred a material problem?
3. The Corporation
Compare a stock's current P/E to its own history1. Large and mega-cap P/Es should be relatively stable. Any trend changes should prompt investigation: What changed—enthusiasm for (P)? Or a problem with (E)?
4. Its Future Self
Compare current and forward P/E ratios. If earnings are growing, the forward P/E should be lower (same price, higher earnings = lower ratio).
By comparing P/E ratios across these four dimensions, you can quickly assess reasonableness of price and whether you might be over-paying or grabbing a bargain. However, large deviations from the norm invite further investigation.
Figure 3 highlights an inverse correlation between P/E ratio and expected returns. It confirms Warren's principle: buying at timely moments is the greatest opportunity to add value. Overpaying can destine an investment to disappointing 5-year results.
Figure 3 Source: JPMorgan
Sample: Apple (February 16, 2024)
Source: Figures 4 & 5 (below)
Figure 4 Source: Macrotrends.net
Figure 5 S&P 500 Current P/E as at Feb 2024 Source: Multil.com
Conclusion
Apple shares appear overvalued in an overvalued market. The S&P 500 is trending above its long-term average (27.2x vs. 17.2x). Apple's current P/E exceeds its history (29.7x vs. 18.5x) and peers (29.7x vs. 22.7x industry). Yet Apple's forward P/E is close to historical forward P/E (28.4x vs. 29.7x).
Can paying up be justified as a long-term hold?
Reviewing P/E ratios helps to assess price reasonableness. Fortunately, the backup plan for over-paying on a quality compounder is time in the markets.
Warren's Absolute P/E Scale
Warren's buying discipline revolves around absolute P/E thresholds:
<10: Bargain
11-19: Fair (17 is the long-term S&P 500 average)
20+: Overvalued
30+: Bubble
Following absolute P/E thresholds keeps Warren out of trouble—but also parks cash on the sidelines for very long periods. He currently sits on a record $344B in cash (Sept 30, 2025).
Caveat: Long-term share growth should equal earnings growth. Yet P/E ratios can be pushed to extremes by shifting sentiments and remain divorced from reality for extended periods (Figure 2).
Self-Accountability: The ACB
To know if you're winning, success needs definition. The lowest standard would be to have stocks with unrealized profits. Outperforming a benchmark like the S&P 500 would be the ultimate indicator. Most investors measure their success by a stock's Adjusted Cost Base (ACB)—the average price paid for shares less expenses—becomes a valuable marker:
Which Buy-In Method to Use?
a) Lump Sum Buy
According to Time Magazine journalist Dan Kadlec2, buying in one lump sum has historically outperformed DCA because markets hold a perpetual long-term positive bias. Yet, most investor's prefer DCA.
Choosing between lump sum and DCA should depend on:
Stage of the market cycle (nadir, uptrend, zenith, pullback)
Stock's current price vs. 52-week history
Degree of investor risk intolerance
For investors with a high risk tolerance, lump sum or DCA can be at any time. The market marches on. For risk sensitive investors, DCA at all times would likely be preferred. For patient opportunists, deploying cash as a lump sum when share prices are hitting 52-week lows will justify having hoarded that cash for extended periods.
b) Dollar-Cost-Averaging (DCA)
Start by staking a claim—invest 10-25% at a decent price point. Once established, pre-set slightly discounted DCA orders at 2-5% below your ACB. This mechanical process minimizes second-guessing and gradually lowers your ACB. Equally, to seize a stock's momentum, set Limit Buy orders (above the current FMV). When a share price begins to recover, the triggering of such orders will affirm that a stock is on a more sustained recovery path.
For taxable accounts once profitable, consider writing PUT contracts.
c) Writing PUT Contracts (Advanced)
As an alternative to DCA, consider writing short-term Put contracts (each contract is 100 shares, which is a challenge for smaller sized accounts). The Put seller (you) receives a premium for the potential obligation to own shares. Therefore, if exercised, your ACB would be lower than current market prices by the amount of the premium. You choose the terms: Stock, Strike Price, Duration. And whether exercised or not, you keep the premium.
Three Strike Price choices based on outlook:
OTM (Out-of-the-Money): Bearish. Low probability of exercise, low premiums.
ATM (At-the-Money): Neutral. Medium probability, medium premiums. Most typical for buying into positions.
ITM (In-the-Money): Bullish. Higher probability, higher premiums. Used when shares are temporarily discounted.
When to Use Each Method
Figure 5 provides a schematic outlining when each buy-in method holds merit:
Lump sum: When the market is plumbing 52-week lows
DCA: When sitting on unrealized losses (share price below ACB)
Sell PUT contracts: When sitting on unrealized gains (minimizes ACB impact)
ITM PUTs: When the market/stock has incurred a worthy discount
OTM PUTs: When stock/market is nearing 52-week highs (builds in security buffer)
Figure 5
Behavior: Trading from Strength
At all times, portfolio managers have multiple trades outstanding, each with a specific purpose. Usually trades are set proactively at prices outside the bid-ask range and adjusted periodically until completed.
Retail investors, on the other hand, are more vulnerable—the tendency is to make single trades focused on getting into or out of the action. So by developing conviction for each security (targeting quality assets, knowing why you're buying and that the price is reasonable), it helps to overcome the emotional triggers when markets sell off unexpectedly.
Be the algorithm: Set limit buy orders at off-price bid/ask prices. Stocks often retrace previous lows. Align trades in anticipation of volatility. If you can live with opportunity cost, there are no fees for waiting.
Note: Set trades as "Limit" orders (specific price or better), "GTC" (Good 'til Canceled), and "FORTH" (Fill Outside Regular Trading Hours).
State of Mind
"Emotion is the greatest enemy of superior investing."— Howard Marks, Co-Founder and Co-CEO, Oaktree Capital Management
Greed, fear, anger, and revenge fuel the markets. Yet few good investment decisions are made when emotions are triggered. Staying calm while all around panic is a strategic advantage. Contrarians don't chase trades, they wait for opportunities.
Time of Day
Retail investors are most vulnerable in early and late sessions when price anomalies are prevalent. Algorithms feed on chaos.
Pre-set trade orders before market open to capture weak trades
Be cautious at day's end when day traders liquidate positions
Summary
Three common retail behavioral challenges: chasing prices (FOMO), over-trading, and sitting in cash. Performance improves by learning when and how to use select trading tools:
For initial buy-in, use targeted stock's P/E history. Be attentive to market cycle.
Pre-set buys below bid spreads. When filled, ACBs will improve.
Use limit buys to ensure a stock's momentum.
Buying lump sum relies on conviction for a security and confidence in markets.
If less confident, use DCA to minimize cash's sideline time.
Where possible, write PUT contracts to get paid for your trades.
Less screen time translates into less trading costs and mistakes.
Seek calm. Emotions are costly. Past mistakes are learning opportunities.
Fear is your teacher—its presence suggests opportunity.
While waiting for the "fat pitch," use DCAs and sell PUTs to reduce buyer's remorse.
"The stock market is a 'no-called-strike' game. You don't have to swing at everything. Wait for your pitch."— Warren Buffett
Resources:
Kadlec, D. (2012). "Is Dollar-Cost Averaging Dumb?" Time Magazine ↩
Jay T. Mason, CFA, CFP manages the Oasis Growth Fund and is the author of
“The INVESTING OASIS: Contrarian Treasures in the Capital Markets Desert”,
as well as the blog series: ‘More Buck for Your Bang’.
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The Oasis Growth Fund is Series O of the Fieldhouse Pro Funds Inc trust series available by Offering Memorandum in Canada through select Financial Advisors. This education series is not intended as a solicitation for investment in the Oasis Growth Fund nor is it sponsored by Fieldhouse Capital Management Inc.
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