There’s a wonderfully annoying thing about the stock market. The correction you’ve been patiently waiting for can arrive right after prices have already climbed 15%.
Suddenly, that glorious 10% dip isn’t much of a bargain: a slightly lower price than yesterday and a higher price than the one you could’ve paid months ago.
This’s why long-term investors can spend far too much energy searching for the perfect entry price. Price still matters, of course. Paying anything for anything is a terrific strategy for becoming poorer. Yet when the investment horizon stretches across decades, time has an advantage that a clever limit order simply can’t recreate.
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Don’t wait
Vanguard studied this question using historical and simulated market data. Its research found that investing a lump sum immediately beat gradually holding money back and investing later about two-thirds of the time.
Stocks have historically produced positive returns over long periods, so cash sitting on the sidelines usually misses more upside than it avoids downside. Nobody rings a little bell before the next rally begins.
Consider an investor who can contribute $7,000 annually and earns an illustrative 8% return. If those contributions are made at the beginning of each year, starting now could produce about $345,960 after 20 years.
| PLAN | YEARS OF $7,000 CONTRIBUTIONS | ILLUSTRATIVE VALUE AT 8% |
|---|---|---|
| Start now | 20 | $345,960 |
| Wait one year | 19 | $313,334 |
| Wait five years | 15 | $205,270 |
| Wait 10 years | 10 | $109,518 |
These returns aren’t guaranteed, and real markets will behave much less neatly. Still, the lesson survives different return assumptions. Missing an early year doesn’t merely mean losing that year’s gain. It removes years of future compound growth on top of it.
That’s why this stock could be useful.
H
Hydro One (TSX: H) owns and operates much of Ontario’s electricity transmission and distribution infrastructure. It earns regulated returns by moving electricity through an enormous network of poles, wires, substations, and transmission lines. That rather unglamorous job is becoming more valuable as Ontario needs more electricity for population growth, manufacturing, data centres, electrification, and new generation.
Hydro One stock is already building for it. The company has been advancing several major transmission projects across Ontario, including new infrastructure serving northeastern, southwestern, and eastern parts of the province. As projects enter service, they can expand Hydro One stock’s regulated asset base, providing another foundation for future revenue and earnings.
The latest numbers show the process working. Second-quarter earnings per share increased to $0.62 from $0.54 a year earlier. Hydro One stock also placed $644 million of new assets into service during the quarter. This is the kind of growth that can look rather boring on Tuesday afternoon and considerably more impressive after 10 years.
Valuation
Hydro One stock recently traded around $56, leaving the stock at roughly 24 times trailing earnings. I wouldn’t call that bargain-bin territory. The quarterly dividend recently increased to $0.3531 per share, or about $1.41 annualized, producing a yield near 2.5%, so nothing exciting there either
Plus, there are legitimate risks. Hydro One stock depends heavily on Ontario regulation, and regulators ultimately determine how much the company can earn on its investments. Massive infrastructure spending also requires financing, and higher borrowing costs can pressure returns. Its latest quarter already included higher financing charges as outstanding long-term debt increased.
Those risks are reasons to consider the valuation, not necessarily reasons to spend another five years waiting for perfection. Investors buying stocks in Canada can also build a position gradually. Buying some shares now and adding through future contributions leaves room to take advantage of a correction without requiring one to get started.
Bottom line
There will always be another reason to wait. Earnings season is coming. Rates might change. Stocks have rallied. Stocks might fall. Tuesday feels weird.
Long-term wealth usually isn’t built by correctly guessing. It comes from owning productive businesses long enough for revenue, earnings, dividends, and reinvestment to pile on top of one another.
Hydro One stock won’t be the cheapest stock every day you own it. Yet if Ontario’s electricity needs keep expanding and Hydro One keeps turning that demand into a larger regulated asset base, giving the business another decade to compound could prove far more valuable than saving a few dollars on the original share price.
