Dividend Stocks, Featured Article

The Most Important Investing Concept

Adam Galas

13 postsDecember 4, 2020

As I write this the market is hitting yet another new record high. The S&P 500 is now trading at 23.0X forward earnings and is 39% historically overvalued. Many people worry that the market is overvalued.

They are correct.

Today I wanted to talk about the most important concept in finance, which has made and lost millions of investors fortunes over the years. Understanding and acting on this one simple idea could be the difference between retiring in splendor, retiring in comfort, or not retiring at all.

The Important Difference Between Valuation and Price

Warren Buffett once said, “Price is what you pay, value is what you get.” That’s absolutely correct. And in today’s stock market bubble this is a critical concept that many investors fail to consider.

Stocks are not simply letters and numbers on a computer screen. They represent actual ownership in real companies, which grow, thrive, struggle and sometimes die. The most basic concept in all of finance is the notion of intrinsic value, or the true worth of a company.

There are few absolute truths on Wall Street. But one of these is that intrinsic value is based on the discounted earnings, cash flow, and dividends companies will generate in the future. Or to put another way, a long-term company’s fundamentals determine intrinsic value.

Since the stock price will always return to intrinsic value over time, if you know a company’s fair value, you can avoid costly mistakes. But more importantly make a fortune over the long-term.

Price Is What You Pay, Value Is What You Get

In the short-term the stock market is often hilariously, and very profitably wrong about the value of a stock.

Studies show that just 8% of 12-month returns are a function of fundamentals. 92% are determined by luck. This is why I ignore 12-month price targets from analysts, which are just educated guesses about short-term sentiment.

Instead, I focus on the long-term fundamentals, which determine 91% of stock returns over time. Or to put another way, if you know a company’s fundamentals and intrinsic value, then long-term success is almost guaranteed.

The Long-Term Is Longer Than Most People Think

In the long-term 91% of stock market returns are a function of fundamentals. In other words, in the short-term luck is 12X as powerful as fundamentals. In the long-term, fundamentals are 11X as powerful as luck.

How long is “long-term”? The answer may surprise you. Based on numerous studies it turns out to be 10+ years, which is why stock market bubbles happen. People see a stock soaring for a few years and assume the market must be correctly pricing in its future fundamentals.

Momentum driven traders are often just speculating that the most recent trend will continue. Often these speculators are willing to pay absurd valuations for a popular company. All in the hopes that some greater fool will pay an even higher price later.

For months, or even years, they can be right. But eventually stock prices always return to intrinsic value. Embracing this concept can make you rich.

Even in This Market Bubble, Great Companies Are Always on Sale

In March 2000 the S&P 500 hit a forward PE of 27.2. This was the greatest stock market bubble in US history. It meant stocks were 66% historically overvalued. And over the next 10 years investors earned –1% annual total returns as a result.

You might imagine that there were no good investments you could make in the most extreme bubble in US history. After all, when even Coca-Cola (KO) was trading at more than 40X earnings, how could any investor find a good deal?

Great blue-chip deals are always available, no matter how overvalued the stock market gets.

Berkshire Hathaway (BRK.B) was 50% undervalued in March 2000
Realty Income (O) was 50% undervalued in March 2000. Its price to cash flow was 7X and it yielded a very safe 11%.
Enterprise Products Partners (EPD) was 50% undervalued. Its price to cash flow was 6X and it yielded a very safe 12%

Prudent long-term investors who avoided paying crazy valuations for stocks, didn’t just avoid the stock market’s “lost decade” they made a fortune.

BRK investors who bought during the tech bubble low made 25.1% annually over the next 15 years.
Realty Income investors made 17.7% annually
Enterprise Products Partners investors made 23.8% annually

Smart long-term investors who recognized the difference between value and price during the tech bubble made 1,100% to 2,800% returns over the next 15 years. They literally achieved results on par with the greatest investors in history. More importantly, they locked in the kinds of safe, generous and steadily growing dividend yields that rich retirements are made of.

Today the stock market is once more in a bubble. But just like in March 2000, blue-chip bargains are plentiful.

British American Tobacco (BTI) is 51% undervalued and yielding a safe 7.3%
Enterprise Products Partners is 41% undervalued and yielding a safe 8.9%
Walgreens (WBA) is 40% undervalued and yielding a safe 4.4%
Prudential (PRU) is 37% undervalued and yielding a safe 5.7%
Amazon (AMZN) is 37% undervalued and expected to grow at 36% annually over time

Whatever your needs, goals, or risk profile, something great is always on sale. You never have to sacrifice quality or prudent valuation. Whether you’re looking for the safest high yield, the fastest possible growth, or anything else, always remember that price is what you pay, value is what you get.

Happy Investing

Adam Galas

13 posts

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Adam Galas is a retired Army Medical Services Officer with an economics degree from the University of Minnesota who combines his 23 years of investing experience with a disciplined application of time-tested methods. Adam is holding or has held positions as a professional analyst at The Motley Fool, Seeking Alpha, and Simply Safe Dividends. His work has also appeared on thestreet.com, Forbes and Stocknews.com.

Due to his love of Buffett-style investing in safe, undervalued, dividend growth stocks, Tipranks recently ranked him Americas 43rd best analyst. And he is the second-most followed writer on Seeking Alpha, where as he is also a co-founder of Dividend Kings.

Thanks to a love of Buffett-style investing in safe, undervalued, dividend growth stocks, he was recently ranked the 43rd best analyst in the country by Tipranks and is the second-most followed writer on Seeking Alpha.

Another Day In REIT Paradise: Don’t Mess With Texas

REIT Mutual Fund	Symbol
Alpine Realty Income and Growth Fund	AIGYX, AIAGX
American Century Real Estate Fund	REAIX, REACX, AREEX, AREWX, ARYCX, AREDX
Real Estate Securities Fund	MRESX
AR Capital Real Estate Income Fund	ARIAX, ARICX, ARIPX
AssetMark Real Estate Securities Fund	AFREX
Aston/Harrison Street Real Estate Fund	AARIX, ARFCX
Baron Real Estate Fund	BREIX, BREFX
BlackRock Real Estate Securities	BIREX, BAREX, BCREX
Brookfield U.S. Listed Real Estate Fund	BRUAX, BRUCX, BRUIX, BRUYX
CGM Realty Fund	CGMRX
West Loop Realty Fund	REIIX, REIAX, REICX
Cohen & Steers Institutional Realty Shares	CSRIX
Cohen & Steers Realty Income Fund	CSEIX, CSDIX, CSBIX, CSCIX
Cohen & Steers Realty Shares	CSRSX
Columbia Real Estate Equity Fund	CREAX, CREIX, CRRVX, CRERX, CREEX, CRRFX, CREWX, CRECX, CREBX
Compass EMP REC Enhanced Volatility Weighted Fund	CWRAX, CWRIX, CWRTX, CWRCX
Davis Real Estate Fund	RPFRX, DREYX, DRECX, DREBX
Delaware Real Estate Investment Trust Portfolio II	DPRTX, DPRBX
Delaware Real Estate Investment Trust Portfolio	DPREX, DPRSX, DPRRX, DPRCX
DFA Real Estate Securities Portfolio	DFREX
Dunham Real Estate Stock Fund	DAREX, DNREX, DCREX
DWS RREEF Real Estate Securities Fund	RRRRX, RRREX, RRRAX, RRRSX, RRRBX, RRRCX
DWS RREEF Real Estate Securities Income Fund	REFAX, REFCX, REFIX, REFSX
Eaton Vance Real Estate Fund	EAREX, EIREX
EII Realty Securities Fund	EIIRX
Fidelity Advisor Real Estate Fund	FHEIX, FHEAX, FHETX, FHECX, FHEBX
Fidelity Advisor Real Estate Income Fund	FRIRX, FRIQX, FRINX, FRIOX
Fidelity Real Estate Income Fund	FRIFX
Fidelity Real Estate Investment Portfolio	FRESX
Fidelity Spartan Real Estate Index Fund	FSRNX, FRXIX, FSRVX
Fidelity Series Real Estate Equity Fund	FREDX, FREFX
Fidelity Series Real Estate Income Fund	FSREX, FSRWX
Forward Real Estate Long/Short Fund	KSRYX, FRLSX, FFSRX, KSRAX, KSRCX, KSRBX
Forward Real Estate Fund	FPREX, FFREX, KREAX, KRECX
Forward Select Income Fund	KIFYX, FSIMX, FFSLX, KIFAX, KIFBX, KIFCX
Franklin Real Estate Securities Fund	FREEX, FRLAX, FRRSX, FSERX
GMO Real Estate Fund	GMORX
Goldman Sachs Real Estate Securities Fund	GREIX, GRETX, GREAX, GRESX, GRERX, GREBX, GRECX
Great-West Real Estate Fund	MXREX
Heitman REIT Fund	OARTX, OBRTX
ING Real Estate Fund	CRARX, IREWX, IDROX, CLARX, CRWRX, CRCRX, CRBCX
INVESCO Real Estate Fund	REINX, IARFX, IARIX, IARYX, IARAX, IARRX, IARCX, AARBX
Ivy Real Estate Securities Fund	IRSAX, IREIX, IRSYX, IRSRX, IREEX, IRSCX, IRSBX
John Hancock Real Estate Securities Fund	JIREX
Johnson Realty Fund	JRLTX
J.P.Morgan Realty Income Fund	URTLX, JRIRX, URTAX, URTBX, URTCX
J.P. Morgan Security Capital U.S. Core Real Estate Securities Fund	CEEAX, CEERX, CEEFX, CEESX, CEECX
J.P. Morgan U.S. Real Estate Fund	SUSIX
Lazard U.S. Realty Equity Portfolio	LREIX, LREOX
Lazard U.S. Realty Income Portfolio	LRIIX, LRIOX
Manning & Napier Real Estate Series	MNRIX, MNREX
Morgan Stanley Institutional U.S. Real Estate Portfolio	MSUSX, MUSDX, MSULX, MURSX
Natixis AEW Real Estate Fund	NRFAX, NRFYX, NRFBX, NRFCX, NRFNX
Neuberger Berman Real Estate Fund	NBRIX, NBRFX, NREAX, NRERX, NRECX, NRREX
Nuveen Real Estate Securities Fund	FREAX, FARCX, FRSSX, FREBX, FRLCX, FREGX
Oppenheimer Real Estate Fund	OREAX, OREIX, OREYX, ORENX, OREBX, ORECX
PHOCAS Real Estate Fund	PHREX
PIMCO RealEstateRealReturn Strategy Fund	PRRSX, PETPX, PETAX, PETDX, PETCX, PETBX
Pioneer Real Estate Shares	PWREX, PYREX, PCREX, PBREX
Principal Real Estate Securities Fund	PIREX, PIRPX, PREPX, PRETX, PREJX, PRRAX, PRERX, PRENX, PRAEX, PRCEX, PRLEX
ProFunds Real Estate UltraSector ProFund	REPIX
Prudential Select Real Estate Fund	SREAX
Prudential U.S. Real Estate Fund	PJEAX, PJEZX, PJECX, PJEBX
REMS Real Estate Income 50/50 Portfolio	RREIX
REMS Real Estate Value-Opportunity Fund	HLRRX, HLPPX
Rydex Real Estate Fund	RYREX, RYHRX, RYCRX
SA Real Estate Securities Fund	SAREX
SEI Institutional Mgd Real Estate Fund	SETAX, SEIRX
Spirit of America Real Estate Income & Growth Fund	SOAAX
SSgA Clarion Real Estate Fund	SSREX
Stratton Real Estate Fund	STMDX
T.Rowe Price Real Estate Fund	TRREX, PAREX
TIAA-CREF Real Estate Securities Fund	TIREX, TRRPX, TRRSX, TCREX
Vanguard REIT Index Fund	VGSNX, VGRSX, VGSLX, VGSIX
Virtus Real Estate Securities Fund	PHRAX, PHRIX, PHRCX, PHRBX

REIT ETF	Symbol
Flex Shares	ASET
Wisdom Tree Global Ex-US	DRW
S&P 500 Equal Weight	EWRE
iShares FTSE Industrial/Office	FNIO
MSCI Real Estate Index	FREL
S&P REIT Index	FRI
First Trust S&P REIT	FRI
iShares Real Estate 50	FTY
Flexshares Global	GQRE
iShares Cohen & Streers	ICF
iShares International Developed RE	IFGL
iShares US RE	IYR
Premium Yield Equity REIT	KBWY
ETRACS Monthly Pay 2x Leverage	MORL
Market Vector Mortgage	MORT
iShares Global REIT	REET
iShares FTSE Mortgage	REM
iShares Residential	REZ
IQ US Real Estate Small Cap	ROOF
iShares FTSE NAREIT Retail	RTL
DOW Jones Global RE	RWO
SPDR Dow Jones	RWR
Schwab US REIT	SCHH
Super Dividend REIT	SRET
ProShares Ultra RE	URE
Vanguard REIT	VNQ
Vanguard Global ex-US	VNQI
iShares International Developed	WPS
Wilshire US REIT	WREI
Pacer Benchmark Data & Infrastructure RE	SRVR
Pacer Benchmark Industrial RE	INDS
Pacer Benchmark Retail RE	RTL
Hoya Capital Housing	HOMZ
NetLease Corporate RE	NETL

REIT Name	Ticker	Annual Increases/yr
Federal Realty	FRT	51
Universal Health Realty	UHT	33
National Retail Properties	NNN	29
Realty Income	O	27
Tanger Outlets	SKT	26
Urstadt Biddle	UBA	25
Essex Property Trust	ESS	25
W.P.Carey	WPC	22
National Health Investors	NHI	17
Equity Lifestyle	ELS	15
Digital Realty	DLR	15

The Most Important Investing Concept

Adam Galas

13 postsDecember 4, 2020

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