Jefferson Ridge

Long only, value, dividend investing
Jefferson Ridge
Long only, value, dividend investing
Contributor since: 2012
Thanks for your comments.
To address the first point: I'm not 100% convinced that college will be worth the cost in 18 years, so using a tax-advantaged account isn't ideal for my viewpoint. I agree that tax-advantaged accounts can provide a better outcome. But the flexibility of a taxable, regular account is of great value to me.
And the second point is very good. Toning down the risk profile as college approaches is prudent. I'm also considering attempting to get a job at a university that offers free or reduced cost tuition to family members of employees as college gets nearer. But we'll see as time passes.
Yes, PHG is planning to split up. That's a benefit to the portfolio, as I see both companies having bright futures - pun intended.
Mostly Small Caps,
I completely get that kids create a whole new set of expenses. We've had our share of surprises like your daughter's new outfit at the hospital story. Thanks for sharing.
And I also sort of agree that college costs may rise faster than inflation. But at some point, the return on investment for going to college will break down if incomes don't rise faster than inflation. I would argue it's hardly worth attending college today, depending on line of work and college choice.
Thanks for the write-up on MAT's dividend security. Hard not to like the company at these levels.
Good stuff. Investing for the long-term for your young child will bear fruit in the future. Best of luck.
Mr. Clucas,
I couldn't do a good job valuing 500 companies either. I'm reliant on using alayst estimates, which creates issues to be sure. I think it creates a solid starting point and is superior to assuming some random multiple.
Your approach is interesting. Having used it for 40+ years must mean it works fairly well. I think consistency of approach will lead to satisfactory outcomes - it allows one to avoid getting too excited and/or scared in extreme circumstances.
Thanks for pointing out the math error. I hope it doesn't change your view on the usefulness of the tool overall. It's interesting that your methodology leads to similar S&P 500 valuation levels today. I wonder how they would compare in different growth and interest rate periods.
I get this conern about growth exceeding the cost of capital. The way around it is to use an earnings number that is after the above-trend growth rate. A company cannot grow at a rate exceeding GDP forever as then they would overtake the economy.
And a company that has "poor earnings" and pays no dividend will have a 100% plowback - and a higher P/E, all else equal. But 100% plowback should lead to more growth than 95% plowback. The cost of capital could offset a company that cannot invest at a good return.
Any valuation tool has weaknesses and strengths. There is a lot of judgement needed in stock valuation.
You can plug in the numbers as easily as me for Amazon. Beta of 1.03 leads to a cost of equity of 8.51%. Using the implied 4.6% growth rate in the broader market and 100% plowback gives a Justified P/E of 26.8x. Obviously, Amazon trades at a much higher multiple than that. The way to get around companies like Amazon (with much higher EPS growth potential) is to look at an out-year/steady-state estimate and discount it to the present.
Great question/point. I could be convinced either way. My initial reaction would be that buybacks should add to EPS, so it's sort of like reinvesting in the business. Thus, perhaps they don't need to be adjusted out of payout ratio.
My state allows folks to purchase college tuition credits at today's rates for use in the future. It's not a bad deal, if you're sure your kid will attend college and, if so, at one of the state schools. You've got to trust that the rules won't change, but it's probably worth looking into for a portion of the costs.
Congrats on paying off your mortgage early. I've got quite a low interest rate on my mortgage and have no plans of refinancing or paying it off early. My $1,250/quarter assumes inflation in hitting my target cost of college in 18 years. If the funds in this strategy aren't enough to cover the costs of college (and attending still makes financial sense), then I will personally fund the gap. But you're right, with inflation, the $1,250 will be less in real dollars over time than it is today.
I'll make 4 purchases each year, but won't concern myself with diversification. Just thinking about what my child liked/used most that quarter and buying the company. That being said, I expect quite a few repeat purchases. Diapers will likely be a repeat this year. Band-Aids in the coming years. Disney will likely dominate my purchases for a few years. I'm not worried about the portfolio getting too diversified.
I'm not investing in any advantaged account. Just a regular custodial account. It maximized flexibility of investment options and uses of funds.
Fair enough, built4tilt. My counter argument would be you that I'm purchasing an investment. "I'm purchasing that duplex as an investment property."
What bothers me is when people say they need to "invest" in a new hair dryer or something like that. I've never really thought of it the other way around, as you point out.
Thanks. I have no doubt that adequate returns will be earned over time.
There is no shortage of reasonably priced colleges out there. Community college is a great value.
That would be a dream come true.
I like tax benefits, but 529s have to be used for college. I'm concerned that college costs will rise to the point where attendance isn't worth the expense. I'll be using a custodial account, which allows the first $1,000 of gains/income to be tax-free. But more importantly, if I have a kid that wants to start a business, this method of savings gives them a headstart in life.
I'm completely with you. I think the returns will be adequate using this strategy, but the potential lessons along the way will be even more valuable than any returns. Giving a tangible lesson - where real money is made and lost - will only help my child as they enter their adult life, having had experience investing growing up.
Good stuff, Divvy Investor. I'm sure it has been fun building up some savings for your kids. It's such a good way to teach about investing. They can contribute to idea generation as they get older.
I normally would agree about buying at opportune times rather than automatically, but we're not talking about huge amounts of money here. And the lesson I'm trying to demonstrate to my child is that consistent investing over time will lead to satisfactory results, regardless of valuation. I believe PG will provide adequate returns at today's prices over the coming 18 years.
Yeah, JNJ will undoubtedly make an appearance someday.
And on student loans: I'd be all for the strategy if interest rates are below my expected return on the portfolio.
Thanks for the thoughts. I could see my assumption for inflation and return being proved wrong. But I wanted an easy to explain and calculate starting point to use as a teaching exercise for my kid over the years. 10% is a nice, round number that is easy to calculate.
PG can look expensive bu certain metrics, but I'm with you that the 18-year time horizon makes price less important. Plus, I'm sure I'll be adding more shares over the years - potentially when shares are universally cheap.
RSRinehart: I'm with you that 10% returns is an aggressive assumption. But it's a nice round number and I'm prepared to fund any gap. This is a teaching opportunity for my kid to show that consistently socking away money leads to great outcomes over time.
And I'm very excited to see the portfolio evolve as my child's tastes evolve.
I plan to use a custodial account. 529 plans are too restrictive in the investment options and use of funds.
And there will definitely be multiple purchases of certain stocks. I will just be making 4 purchases a year.
Thanks for the support. I hope your assessment is correct!
I agree. Technology grows more important every year. I can't even fathom how much more advanced the next generation will be vs. us old folks.
barry twilight,
Your statement is true. I'd argue that college costs cannot continue to grow faster than inflation. If they do, going to college is a negative NPV use of money. And there are ways to further reduce costs - like attending community college for 2 years.
Thanks for liking the way of picking stocks. I think it will end up yielding satisfactory results and be fun along the way.
If actual costs end up being somewhat higher than my projections, I'll fund the gap with personal savings/cash flow. But I think $10-15k/year for tuition plus $10-15k for "living expenses" is more than adequate at an in-state school. Living off-campus will eliminate room & board...and likely prove cheaper.
Exactly, Long Haul Investor. In-State Colleges are by far the best value. I added room & board and textbooks to my in-state tuition to get to $25k, but otherwise you're spot on.