Judging from the many emails and board postings I've read, many people misunderstood the intended message of last week's Drip column. That's my fault. I told you that I wasn't thinking clearly enough to buy something new last week. I apparently wasn't thinking clearly enough to write a clear column, either.
Many readers took last week's column to task, saying things like, "You've said for four years that buying on stock market declines is a good idea, so how can you back down and not buy now?"
Receiving questions like that, I've written back dozens of emails clarifying last week's column, but I need to clarify here, too.
Last week's column was about buying something new right now. We have been working toward announcing a brand new purchase, and I had hoped to have that announcement by early September. However, the September 11 tragedy changed that. I was no longer in a position -- no longer ready -- to announce a new buy, if there was going to be one.
In addition, Paychex (Nasdaq: PAYX), our lead contender for a new purchase, announced results last Thursday that were disappointing to me. Yes, the company grew earnings per share 20% in a very difficult environment, with just about everything working against Paychex that possibly could -- falling interest rates, a slowing economy, the failure of hundreds of small businesses, etc. However, Paychex had previously been growing earnings per share 36%, so a drop to 20% is significant.
This slowdown forces us to reconsider the company under a new light, especially in regards to valuation. But either way, last week I wasn't ready to consider a new buy. I did say, however, that I'd keep sending money to existing Drips. And right now, that's what matters. That's what is important.
We buy more on declines
Great long-term investors use the market's darkest hours to buy more shares of the world's brightest companies.
Great long-term investors buy shares of exceptional companies while the vast majority are selling.
We have years and years ahead for our money to work for us in the stock market. We are investing in the strongest stock market in the world. As Warren Buffett recently said, paraphrasing, "It's dumb to bet against the United States of America. It hasn't worked since 1776." We are also investing in some of the strongest companies in the world, too.
This week we'll send our existing cash-on-hand to two of our current investments, Intel (Nasdaq: INTC) and Mellon Financial (NYSE: MEL). These two companies have been the hardest hit in our portfolio since the market reopened on September 17. As of Monday morning the 24th (which is when this column was written), Intel was near $20 per share and Mellon was at $31, both down more than 30% from recent prices.
Now, it's folly to value these companies based on next year's earnings estimates, because those estimates are more uncertain than ever. Valuing on past earnings has limited use, too. However, for reference, Mellon is at 16 times past earnings, which is nearer the low end of its historical P/E range; and it's at 14.7 times next year's earnings guess. Intel is at 26 times trailing earnings, and about 29 times next year's estimate. But again, next year's estimate could prove too conservative, or may prove aggressive. We can't know. We simply need to subjectively consider each business' long-term potential well beyond next year and invest accordingly.
We could run a discounted cash flow model and simply assume that Intel resumes 10% annual growth and then see how it may be a good value by 2004 at current prices, but there's little point in running a model today that is determined by our own subjective assumptions. Investing involves, as even the world's best investors will tell you, a great deal of faith. No matter how sophisticated your models of assumptions are, you still take a leap of faith when you buy a stock. To defend against uncertainties, you buy the strongest businesses you can find.
You buy strong businesses based on past performance, management, competitive market position, sustainable advantages, brand, balance sheet, cash flow statement, and other concrete measures.
Of our money on hand, we'll send $100 to Intel and $100 to Mellon. This money was being saved for a new purchase, possibly Paychex, but that decision is put on hold. We'll return to the subject of Paychex next week.
We'll emerge from this stronger
In conclusion: Yes, continue to buy, to average in, during market downturns. That is the best time to buy more of the stocks that you are familiar with and you believe in for the long term. Though it may be hard to see it today, eventually America's economy should be stronger as a result of the recent attacks. We're forming worldwide coalitions with many other countries following the attacks. We're lifting trade sanctions on some countries. The world seems a much smaller place, a place that is committing to working together like never before.
In fact, the terrorist's attacks will, I believe, have the exact opposite effect of what the terrorists hoped. It is bringing the world together. It will result in a stronger, more unified world than ever before.
--Jeff Fischer, September 24, 2001
Jeff Fischer owns the stocks in the Drip Port. The Fool has a full disclosure policy.