825 Gum Branch Road
Suite 108
Jacksonville, NC 28540
Phone: 910-346-0911
Fax: 910-346-8112
Contact Us

Map & Directions

Stock Investment Policy

Stock Investment Policy
2007
By Richard W. Schrum

Over the years I have seen many fads, exotic strategies, up markets, flat markets, and down markets. I have been an investor for over 40 years and have learned many lessons throughout my lifetime. When investing in individual company stock we must focus on two key areas, valuation and dividends. It sounds very simple, but quite often investors trying to reinvent the wheel overlook the simplest things.

Valuation

In order to understand valuation, we must understand what stock ownership truly is. When an investor buys stock, they are not “investing” in a company. The investor is actually buying a business with shared ownership. Somehow, by sharing the ownership and the risk, most investors do not look at valuation. The old credo, “Buy low and sell high!” still stands true today. Unfortunately, many investors move in a herd mentality not based on the fundamentals. This is what can cause market bubbles, high volatility, and investment losses. If an investor were to buy a business outright, the price of that business as a reflection of the business’ earnings would be under a magnifying glass. A business owner will not overpay or they won’t be in business very long! This idea of what a business is worth should not change when an investor is buying fractional ownership in a company. So how do we value a business?

Stock valuation can be complicated, with many different methods. Many stocks are valued as the present value of the future cash flows. This model uses estimated numbers that cannot accurately reflect the value of the stock due to changes in economic conditions, competition, and other unknown variables.

When I look for a good company to buy, I always look at the price of the stock in comparison to its earnings / income. This PE (price earnings) ratio is a good measure in determining what the stock is worth in today’s dollars using real numbers. I believe that using the present day “real numbers” facilitates good judgment when buying stocks than the more speculative “estimated cash flows” approach.

Dividends

Dividends are also a crucial aspect of whether or not a stock is worthy of ownership for many reasons. First, dividends currently have a more favorable tax treatment than ordinary income with respect to providing current income. Second, by paying out a portion of the money being made as a dividend, it keeps the business investing and focusing on what it does best. This can help avoid the situation where a company sitting on a large amount of cash will invest this money in questionable business ventures outside the scope of their expertise. Third, what better measure of a company’s financial health and cash flow is there than a consistent dividend payment policy? It is the difference between being the business owner who draws an income and enjoys the benefits of ownership and the business owner who forgoes income today with the hope that the business will be worth more some time in the future. My clients and I like a stock that will pay today as opposed to a promise of something in the future… Dividends really do pay!

Dividends are not guaranteed and must be authorized by the company’s board of directors.