Motley Fool Money Mailbag: incl. How can you buy permanently expensive stocks? May 7, 2023
May 6, 2023
They tackle why shares can fall when interest rates rise and how discounting and borrowing costs matter. They discuss paying high multiples for perceived quality and when growth might justify pricey stocks. Practical tips on position sizing, using lump-sum gifts for kids, and why companies rarely pay monthly dividends. They also explain how to spot inflation-driven sales versus real volume growth.
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Cafe Taught Margin Versus Turnover Lesson
- Andrew ran a cafe and learned high gross margins don't guarantee profit because fixed staff costs require high turnover.
- They aimed for premium coffee but charged market prices, leaving high percentage margins but tiny dollar profits.
Higher Rates Shrink Profits And Valuations
- Rising rates reduce corporate profits by increasing interest expenses on debt and slowing the economy.
- Combined with opportunity-cost and sentiment effects, these forces compress valuations and share prices across markets.
Use Large Margins Of Safety In Valuations
- Recognize valuations and forecasts are guesses; build a large margin of safety in inputs.
- Use conservative assumptions, know key conditions that must occur for your thesis to work, and wait for mispricings.