If You Love an "Overvalued" Stock, Should You Buy Anyway, or Wait?

One of the best-known investing cliches is "buy low, sell high." The implication, of course, is that if a stock is trading at a premium, you've missed your chance -- either wait for a correction to bring it back down to earth, or move on and look elsewhere. But a 25-year-old MarketFoolery listener isn't sold on that approach. He's interested in Twilio (TWLO 1.08%), a cloud communications platform-as-a-service company that by many measures has a high valuation, but that he sees as having long-term growth potential. Should he invest now, despite the negative mutterings about a share price bubble, or wait for a better entry point? That's a great question, and in this podcast segment, host Chris Hill and senior analyst Seth Jayson talk about this company, and the broader question of "buy high and hold long," or "wait for the dip"?

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on April 22, 2019.

Chris Hill: Question from Scott Sir-Sira---

Seth Jayson: Sorry, Scott!

Hill: Sorry, Scott! Totally blew your last name.

Jayson: Scott with a last name that we're not smart enough to say.

Hill: Scott Siracusano. Third time's a charm.

Jayson: Is it Italian?

Hill: Seems to be.

Jayson: Is the first letter C, with an I after it?

Hill: No, it's an S-I-R. Let's get to the question. Scott writes, "I'm 25 and very new to the investing world and have felt somewhat lost in which direction I want to take my portfolio." Let me just pause right there and say, hey, that's just great, that you're 25 and starting your investing journey. So kudos to you!

Jayson: Start with some index funds.

Hill: "There's a specific stock, Twilio, that has a very high valuation, and I hear words of a bubble popping. However, I like the idea of a new company showing a lot of strength and taking people by surprise. They have a very strong outlook and their potential for growth with their super network gives me a positive outlook despite all of the bears. Even if a stock is considered overvalued, is it still worth investing in if you see long-term growth with the risk of a significant pullback? Or, should I wait/hope for another dip and buy in on that? I don't want to miss the train, but I also don't want to make an impulsive purchase. Any help would be appreciated. Keep doing amazing things, guys." Thank you! Thank you, Scott! Great question!

Jayson: 25?

Hill: Yes.

Jayson: That sounds a lot smarter and wiser than 25, recognizing that the impulse to get on the train is really dangerous. I own this stock, despite those high-looking valuations. A lot of this depends on how much money you've got, how much money you're willing to put in, where the rest of your money is. What's your risk tolerance? What's your timeline? I believe that if you are looking for high-growth companies like this, and you can tolerate some major ups and downs, I don't think this is the kind of a stock that becomes a zero at any point. But I definitely think it'll fly around. We're trading at like 15 times revenues or something right now. This stock is going to be a wild ride.

I own it because the more I looked into it -- and I'm not an expert -- the more it looked like of a mini, next-generation AT&T, if you will. They made things so easy for developers. That's how their technology is being embedded in so many other platforms. They're becoming a default, the Google, the Kleenex, if you will, something along those lines. To me, that's very powerful. Companies like that, if you have the risk tolerance and the capital, I think are always worth owning a little bit of.

As for waiting for a dip, I have learned over the years not to do that. I have waited for dips on Netflix, waited for dips on Amazon when they didn't come, then I forgot to buy at a 15 times smaller valuation than it is now. If you like what a company is doing, and you have the risk tolerance, buy a little, and then watch. That's what I tell everybody. That's what I do myself. I can't give individual individual advice. But that, I think, is a good strategy.

Hill: Along those lines of waiting for a dip, I have also learned over time, through painful experience, not that painful, but painful enough, that I never want to fall in love with a price. Anytime in the past when I have been quote-unquote "waiting for a dip," I have put a price tag on what I think that dip should be. I've been in the situation where, "The price has fallen, but it hasn't fallen to where I think I should buy it." And then it ends up rising and never stops rising and I missed the boat.

Jayson: I recently started owning more stocks. I think I own more than 60 stocks now. That works for me. One thing I like about it, I've always got something doing well. If I've got something in the crapper, as we say, it doesn't bug me that much because I've got so many other stocks. A lot of this will depend on your overall strategy. This is a small portion of my portfolio, as all of them have to be when I own that many. I just find that that works for me.

Hill: And he's 25 years old.

​Jayson:​ You've got some time.

Hill: He's got 70 years.

Jayson: Don't bet it all now. The most important decision you can make is getting into the right frame of mind, putting that money away every month. One thing I do is, about half of my retirement stuff still goes into index funds every month. That way, you're saved from a lot of stupid mistakes because it's on autopilot.