The Holy Grail of Investing: The Confluence of price, preparedness, and powder.

3 things must occur simultaneously to create a buying opportunity when investing:

1 - The price of the asset drops at or below a fair value

2 - You are prepared through research to understand that fair value and when it has done so

3 - You have the $ (dry powder) to take advantage of the opportunity

Stocks are almost always trading at values that are above their long term intrinsic value. This creates the necessity for patience and preparation for purchasing high quality stocks at fair or below fair prices. The key is knowing when/where that fair price is, and having the stomach to sit and wait for that moment to occur. Most people either don't have the stomach or don't do the preparation and research to understand pricing.... and the rest... don't have the cash when it happens.

Look at this chart below. If you can wrap your head around the concept that each of these years that show RED in the TR (Total Return) column are likely buying opportunities for high quality businesses at discounted prices, then you can better understand how rare that opportunity is.

How does one prepare themselves to be ready for said opportunity years?

That brings us to the other half of the equation, and the side less talked about in investing:

When/if/and how to create the dry powder (cash or liquid investments) to take advantage of buying opportunities.

There are many ways to execute this side of investing. One of my favorite being the diversion of dividend reinvestment into short term fixed income instruments like money market or short term treasuries during the taller green years on this chart. Dividends are % based, so as the value of your portfolio grows, the dividend payouts grow with it. If you take the approach most of the time of automatically reinvesting these dividends back into the companies you own you can create immense compounding power over the long run.... but we must understand that reinvestment is the activity of buying, so we must toggle this function depending on the environment. If we can divert this reinvestment into alternative short term or liquid lower return assets at times of high valuation, we can start to stockpile our dry powder for downturns. This way we are not buying more of our holdings at the top at overvalued prices, and we are preparing for moments of fair prices with large stockpiles of cash and liquid assets for when the thing turns on its head (which it seems to always do).

Another approach investors take is to implement trimming of their winners, though trimming does create a taxable event. One must be aware of the tax implications of selling, and the factors involved in calculating that tax burden ( short term vs. long term capital gains, current tax rates, your annual income levels in that given year, etc.). Remember to consider tax costs when calculating whether a move is going to be a REAL profit or loss activity. Tax is a cost that must be calculated in your comparison of investment choices. I do sell far less than I hold, though there are moments in time where valuations, optimism, and over-exuberance get soo out of hand (this past January/Feb's United States "exceptionalism" trend) that I can't help but trim some off the stocks that have yielded immense growth off the back of said trend.

Remember THE CONFLUENCE:

1 - prices drop

2 - you are aware through research and preparation

3 - you have the cash to take advantage

This is the compass I use. You can build your own compass through experience, trial and error, or my personal favorite: AN IMMENSE AMOUNT OF READING AND RESEARCH. Just please do not try and sail without a compass! You'll likely end up at a destination far from where you intended.

Gene James McAward