July 31, 1995
Breaking Up Is Hard
to Do
by David Forrest
(TMF Bogey)
One of the many wonderful things about The Motley Fool is that it's a super place to come and learn, in an unintimidating way, about investing your hard-earned money. The Fool teaches us amazing things like "Beating the Dow" and "da Peg"---simple, accessible ways to value companies and get "into" the market.
Yet The Fool, generally using long term buy-and-hold strategies, doesn't counsel all that much on when to SELL. Sure, Beating the Dow is easy. Each year you sell the old BTD and buy the new. But what about those smaller growth companies? Those are the ones that will really beef up your bottom line, right? How do you know when to leave THAT party? Read on, Fool : )
To explain how I feel about selling, I want you to let your imagination wander back to your good ol' high school days . . .{harps cascade in the background, transporting us back in time}. Remember when you were seventeen? It's a warm spring afternoon and Mrs. Crabapple is trying desperately to get you to understand Pythagoras and his wacky theorem. All you can think about, though, is a "certain someone" two rows over. You pass a note to your best friend next to you, admitting your infatuation. It reads something like this :
What beautiful eyes! What a killer smile!
He/she is SO cool! He drives such a hot car!
She's so pretty! He's the captain of the Football team!
She's the captain of the Football team! (ouch!)
You get the idea. You fell in love for some pretty clearly-defined reasons. They may not have been the best reasons in the world, but hey, at least you had them and they meant something to you. You also found out that eventually one of two things happens. Either you fall madly in love, get married and live happily ever after, or---you BREAK UP. Maybe you see that those "beautiful eyes" are really colored contacts. Or that killer smile you were so enamored with is just a bad case of indigestion. Perhaps you realize that she's the captain of the Football team and wants to make you the tackling dummy. And that car? It's louder than a 747, and he's always borrowing gas money from you to cruise with the boys! The point is, as time goes on, things can go wrong with what originally looked like a perfect picture.
The same can be true with a company that catches your eye.
Perhaps you like their piles of cash and their lack of debt. Maybe there's no competition. You do the PEG and it's .45! All systems go, right? Great product, right? So you buy shares, and start a relationship. You expect to average up after each stellar earnings report, really tying the knot, and becoming wealthy together beyond your wildest dreams until . . .hold on here. Reality check. Somewhere down the line, more than likely, your company will be unfaithful and disappoint you. Maybe they use up half their cash paying hefty bonuses to stodgy executives who have grown lazy. No debt? Hah, now they're issuing bonds left and right to raise more dough to pay those "fat cats." Competition is everywhere. Newer products are making theirs obsolete. The PEG is 4.6. ACK!
Is your love blind? It better not be. When you buy a stock, you should have very precise, very clearly-defined reasons for doing so. Write them down, and pass them to your best friend. :) Whenever news comes out, or the company reports earnings, re-evaluate. Look for cracks in the facade, and weak links. Is that cash being used properly? Is the product still cutting edge? Are the executives taking big salaries, or are they compensating themselves with stock options making their net worth directly related to the performance of the stock? Where's the PEG now?
Dig deep, look at the full picture. If all continues well, maybe you WILL live happily ever after. But when that company begins to do things that "strain" the relationship between the two of you, seriously consider that old teenage ritual . . . BREAKING UP. It may be hard to do, but it'll save you a lot of heartache in the long run. And besides, as another old song says, "There's a lot of fisheeees in the sea."
Class dismissed!
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