Why are some long term investors so concerned about their entry price?

Question

A long term investor is usually defined as someone who enters an investment for, say, 10, 20, 30 years or more. Generally they buy an investment to help meet a certain objective in their lives (e.g. retirement) and keep it until they reach that objective.

So why when it comes to investing in such assets as stocks or indexes or ETFs are some of these long term investors so concerned on their entry price?

I know of investors who have waited and watched the market to get 1% or less off the current traded price to buy in (and they won't buy it if it goes higher up, willing to instead forgo the investment if the price does not come back down). But once they have bought it (if able to get it a the lower price) they are willing to let it fall another 5%, 10%, 20% or more with the justification that they are in it for the long term.

Why is so much effort made to get a small percentage off an investment, if one is then willing to let the investment drop another 20% or more with the reason of being in it for the long term?

Answer 1

It has got to do with the irrationality of humans.

The so called long term investor is in it for the long term, they are not worried about market fluctuations nor timing the market. But yet they will aim to try to get a bargain when they buy in.

It is contradictory in a way. Think about it; if I buy a stock and it drops by 30% I am not worried because I am in it for the long term, but I am worried about getting 1% off when I buy it.

They usually tend to buy when the stock starts falling. However, what they don’t realise is when a stock starts falling there is no telling when it will stop. So even if they get a bargain for that day, it is usually quickly wiped out a few days later. Instead, of waiting for the price to find support and start recovering, they are eager to buy what they think is a bargain.

I think this type of long term investing is very risky, and the main reason is because the investor has no plan. They just try to buy so called bargain stocks and hold them until they need the money (usually in retirement). But what happens if the stock price is lower when they want to retire than when they bought it? I hope no long term investor was trying to retire in 2008. If they simply had a plan to indicate when they would buy and under what conditions they would sell, and have a risk management plan in place, then maybe they could reduce their risk somewhat and conserve their capital.

A good article to read on this is What's Wrong With Long-Term Investing.

Answer 2

This is not hypothetical, this is an accurate story.

I am a long-term investor. I have a bunch of money that I'd like to invest and I plan on spreading it out over five or six mutual funds and ETFs, roughly according to the Canadian Couch Potato model portfolio (that is, passive mutual funds and ETFs rather than specific stocks).

I am concerned that if I invest the full amount and the stock market crashes 30% next month, I will have paid more than I had to. As I am investing for the long term, I expect to more than regain my investment, but I still wouldn't be thrilled with paying 30% more than I had to.

Instead, I am investing my money in three stages. I invested the first third earlier this month. I'll invest the next third in a few months, and the final third a few months after that.

If the stock market climbs, as I expect is more likely the case, I will have lost out on some potential upside. However, if the stock market crashes next month, I will end up paying a lower average cost as two of my three purchases will occur after the crash.

On average, as a long-term investor, I expect the stock market to go up. In the short term, I expect much more fluctuation. Statistically speaking, I'd do better to invest all the money at once as most of the time, the trend is upward. However, I am willing to trade some potential upside for a somewhat reduced risk of downside over the course of the next few months.

If we were talking a price difference of 1% as mentioned in the question, I wouldn't care. I expect to see average annual returns far above this. But stock market crashes can cause the loss of 20 to 30% or more, and those are numbers I care about. I'd much rather buy in at 30% less than the current price, after all.

Answer 3

Because buying at discount provides a considerable safety of margin -- it increases the likelihood of profiting. The margin serves to cushion future adverse price movement.

Why is so much effort made to get a small percentage off an investment, if one is then willing to let the investment drop another 20% or more with the reason of being in it for the long term?

Nobody can predict the stock price. Now if a long term investor happens to buy some stocks and the market crashes the next day, he could afford to wait for the stock prices to bounce back. Why should he sells immediately to incur a definite loss, should he has confidence in the underlying companies to recover eventually?

One can choose to buy wisely, but the market fluctuation is out of his/her control. Wouldn't you agree that he/she should spend much efforts on something that can be controlled?

Answer 4

1. I'm not sure who specifically you are talking about. Those are some pretty broad generalizations. Where do you draw the line about what is too much concern about entry price? On what basis do you make the assertion that they are overly concerned with it?

2. For those that do: Probably because when you are buying anything, a lower price is preferable in general. Why WOULDN'T you want to get the best deal possible?

3. I think you are making assumptions (about whom I don't know) that people always invest based on cold hard logic. This is not often the case.

Answer 5

If you think of it in terms of trying to get an annual return on your investment over the long haul, you can do a simple net present value analysis to decide your buy price. If you're playing conservative with the investments and taking safety over returns, you will still have some kind of expectation of that return will be. Paying slightly more will drag down your returns, perhaps less than what you want to get. If you really want to get your desired X%, then stick to your guns and don't go down the slippery slope of reaching. If 1% off isn't bad, then 2% off isn't all that bad, and maybe 3% is OK too for the right situation, etc. Gotta have rules and stick to them. You never know what opportunities will be around tomorrow. The possible drops in value should be built into your return expectations.

Answer 6

One rational argument is the following: Any trade comes at a price both in terms of fees and effort. This is why most long term traders minimize the number of trades. However, you have to do at least one trade in order to convert the money to stocks. If you believe that small gains (comparable to the fees and effort invested) can be made by timing the market then you might want to time your first purchase since you have to pay the "transaction cost" anyway. This is entirely reasonable to me. The efficient market hypothesis will basically tell me that no gain greater than the involved transaction costs can be made with readily available information. However, it is actually reasonable that small easy money is for grabs as long as taking it comes at the cost of equal or higher transaction fees. Of course large automated trading systems probably have less of a transaction cost then individuals meaning that this barrier that keeps the market from equilibrium is probably much smaller than your individual transaction costs.

See for example this answer https://money.stackexchange.com/a/125341/67660 for a possible known market trend that you could in principle take advantage of if there were no transaction costs. Investors are not taking advantage of it (which would make the trend disappear) due to the hidden costs in doing so. It seems to me that at least the second point would not affect the long term individual investor if he is using his own money that he would not otherwise be using. The first point should also not really affect him since the long term investor is typically looking for the highest long term expected yield and not for risk minimization. (Most long term investors are happy to take more risky positions if it comes with a higher expected average yield.)

(Having said these things, quite likely irrational arguments are far more often the cause, see other answers. I just wanted to point out that a rational argument can be made.)