Paul Price: Doctors Make the Best Investors – Here’s Why

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Paul Price: Doctors Make the Best Investors – Here’s Why

Headshot of Dr. Paul Price
Med students have a set basic curriculum that must be completed in the proper order. Basic sciences come before more complicated ones in the same way that algebra precedes calculus. Physicians always learn histology- the study of normal tissue, before they can master pathology- the study of abnormal tissue. The reason is glaringly simple.

You Cannot Recognize Abnormal Until You Know What Normal Looks Like

“Taking the temperature” of a stock can tell you if it’s running a fever, relatively normal or hypothermic and likely to either heat up, or die. Patients’ vital signs are critical in judging their health.

Doctors wouldn’t think about deciding on treatment plans without seeing this key data.

Learn more about How to Research Mutual Funds.

How Do You Find What a Stock’s “Normal” Looks Like?

Consult the records of its vital signs from previous visits. Any company that has been trading publicly for long period of time has a financial history that can be accessed from a number of sources.

I prefer using the Value Line Investment Survey pages, when available. Their sheets offer up to 15 years of per share data, all on one page. It is the only place that combines that volume of information along with the stock price action from the same points in time.

Here’s an excerpt from Value Line’s report on blue-chip Emerson Electric (EMR). The red and green-starred moments are my own annotations showing a snapshot valuation for the stock at various key turning points from previous years.

EMR was usually a good buy when its P/E was lower than normal, and its yield was higher than its own 17.4 average P/E and about a 2.86% dividend. Early in 2011 the P/E was excessive and the dividend was scrawny. The shares dropped by almost 39% in just 10 months.

Buyers at that fall had a chance at a 79% gain over the next couple of years. The exact same shares were first expensive, and then cheap, just months apart. Making money was a function of smart shopping rather than just deciding you wanted to own EMR.

Late in 2013, EMR again got up to $70.66 and 20x trailing EPS. The yield was subpar. As of Oct. 9, 2014, it had regressed back to $60.07 despite posting record numbers this year.

The technique, buying when cheap and selling when pricey, works for proven growth stocks like Buffalo Wild Wings (BWLD) as well.

A bit of simple math showed that 23.7x was a normalized reading for Wild Wings. 2007’s crazy high 43.5 P/E was unsustainable even though BWLD continued to unleash terrific numbers.

Value seekers were able to get in more than three years later, and $14.50 cheaper when the overall investment climate cooled off and the P/E registered way below 98.6 degrees.

Be sure to see our Beginner’s Guide to Domestic Stock Funds.

Stocks like Molson-Coors (TAP) sometimes went years fluctuating between undervalued and somewhat overpriced levels. Knowing that 13.6x P/E and sporting a 2.48% dividend were ‘normal’ helped point out trading opportunities.

The September 26, 2014 reading was the most extreme valuation since the peak in 2008, which preceded a 5.5 year share price stagnation. That doesn’t bode well for the near term, barring a takeover.

Ditto for venerable Coca-Cola (KO). Vital signs point to overpriced territory compared with its typical P/E and yield. Those who paid too much back in 2008 had to wait 2.5 years getting even.

The Bottom Line

Untrained investors often simply listen to the story of a company’s product line or consult its charts to see a stock’s price momentum. Doctors of finance know better. Buy only when the value exceeds the price. Sell when shares are overheated.

Then lather, rinse, and repeat.


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Headshot of Dr. Paul Price

Paul Price: Doctors Make the Best Investors – Here’s Why

Med students have a set basic curriculum that must be completed in the proper order. Basic sciences come before more complicated ones in the same way that algebra precedes calculus. Physicians always learn histology- the study of normal tissue, before they can master pathology- the study of abnormal tissue. The reason is glaringly simple.

You Cannot Recognize Abnormal Until You Know What Normal Looks Like

“Taking the temperature” of a stock can tell you if it’s running a fever, relatively normal or hypothermic and likely to either heat up, or die. Patients’ vital signs are critical in judging their health.

Doctors wouldn’t think about deciding on treatment plans without seeing this key data.

Learn more about How to Research Mutual Funds.

How Do You Find What a Stock’s “Normal” Looks Like?

Consult the records of its vital signs from previous visits. Any company that has been trading publicly for long period of time has a financial history that can be accessed from a number of sources.

I prefer using the Value Line Investment Survey pages, when available. Their sheets offer up to 15 years of per share data, all on one page. It is the only place that combines that volume of information along with the stock price action from the same points in time.

Here’s an excerpt from Value Line’s report on blue-chip Emerson Electric (EMR). The red and green-starred moments are my own annotations showing a snapshot valuation for the stock at various key turning points from previous years.

EMR was usually a good buy when its P/E was lower than normal, and its yield was higher than its own 17.4 average P/E and about a 2.86% dividend. Early in 2011 the P/E was excessive and the dividend was scrawny. The shares dropped by almost 39% in just 10 months.

Buyers at that fall had a chance at a 79% gain over the next couple of years. The exact same shares were first expensive, and then cheap, just months apart. Making money was a function of smart shopping rather than just deciding you wanted to own EMR.

Late in 2013, EMR again got up to $70.66 and 20x trailing EPS. The yield was subpar. As of Oct. 9, 2014, it had regressed back to $60.07 despite posting record numbers this year.

The technique, buying when cheap and selling when pricey, works for proven growth stocks like Buffalo Wild Wings (BWLD) as well.

A bit of simple math showed that 23.7x was a normalized reading for Wild Wings. 2007’s crazy high 43.5 P/E was unsustainable even though BWLD continued to unleash terrific numbers.

Value seekers were able to get in more than three years later, and $14.50 cheaper when the overall investment climate cooled off and the P/E registered way below 98.6 degrees.

Be sure to see our Beginner’s Guide to Domestic Stock Funds.

Stocks like Molson-Coors (TAP) sometimes went years fluctuating between undervalued and somewhat overpriced levels. Knowing that 13.6x P/E and sporting a 2.48% dividend were ‘normal’ helped point out trading opportunities.

The September 26, 2014 reading was the most extreme valuation since the peak in 2008, which preceded a 5.5 year share price stagnation. That doesn’t bode well for the near term, barring a takeover.

Ditto for venerable Coca-Cola (KO). Vital signs point to overpriced territory compared with its typical P/E and yield. Those who paid too much back in 2008 had to wait 2.5 years getting even.

The Bottom Line

Untrained investors often simply listen to the story of a company’s product line or consult its charts to see a stock’s price momentum. Doctors of finance know better. Buy only when the value exceeds the price. Sell when shares are overheated.

Then lather, rinse, and repeat.


Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.


Read Next