As the market recovers from the lows of the start of the year, it’s been difficult to find quality businesses on sale. At about $63, Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) is about 12% off from its normal multiple, which is a decent discount for a top business. But this discount is not as attractive as when the bank was at the low $50 to mid-$50 level.
If the interest rate remains low and the Canadian economy continues to be sluggish, the banks in general are going to grow at a slower pace than before. And that’s why they are selling at slight discounts from historical levels.
If an investor owns shares in Bank of Nova Scotia and doesn’t think it’s a buy, does that mean it’s an automatic sell? In fact, a friend of mine recently sold close to 90% of his holdings in his bank position because he believes the market is going to crash soon–either this year or next year.
I understand his concerns. No one likes seeing their positions fall 25-50%. And it seems smart to realize your profits. However, when deciding whether to buy or sell, it really comes down to your goals, the company in question, and your situation.
There is a third option: holding.
Is your goal income?
If your goal is income, then after buying quality dividend companies at good prices, you can essentially hold them, ignore the price volatility, and receive income forever.
When you sell a company, you might not be able to buy it back at the original low price. If you’re a long-term investor, you should be considering building a diversified portfolio of quality stocks. Sometimes you’ll have holdings that underperform, but sometime in the future, they will likely be the ones to outperform.
Is your goal total returns?
If you’re still working and earning a regular income and have funds available for investing, there’s no reason to sell quality companies unless their fundamentals weaken permanently or their valuations are outrageously high.
When you sell, you not only lose the income generated by the shares, but you also lose the compounding effect of investing.
Conclusion
I understand that investors don’t think a 12% discount is a big enough margin of safety to buy. However, I don’t think it’s wise to sell a quality business below its intrinsic value.
Staying invested is the only way to generate good returns over the long term. Besides, Bank of Nova Scotia’s yield of 4.5% is still at the high end of its historical yield range, which further indicates the shares are a decent value today.
