Selling Strategies AOL Auditorium Event1. Opening Remarks
2. Question & Answer Segment
3. Repeating the Six Rules
1. Opening RemarksTOM GARDNER: Good evening, and welcome to what is going to be an ongoing series from Fooldom, with weekly auditorium events dedicated to investment approaches, individual companies, savings strategies, portfolio management tactics, talks about jobhunting,et al. All with the master plan being, we package them in videos, and sell 'em for $59.99 at 4 AM on TV. Now, we're going to ram forward tonight and make this a much more interactive event than normal auditorium gatherings. . . so here goes!
Welcome to DowMan and to MF Bogey. Bogey has been managing the Selling Strategies folder in The Fool's School for some months, and has for the year, been putting together some great valuations via his Awards Night multi-pricing packages. We'll begin tonight just by having Bogey give us three lessons about selling stocks, then I'll throw out three. Then we'll get to the questions, comments. . . and SNIC cheapshots. Bogey, three selling strategies, please! :)
MF BOGEY: Evenin all ! Just wanted to get started by saying that this discussion comes at a pretty volatile time in the markets. I wanted to assure everyone that we aren't here to convince you to sell everything : )
Basically, the biggest problem investors have is not deciding what to buy but rather they suffer most over when and why to sell. I have a few basic rules I follow. The first is the Cardinal Rule and has nothing to do with actually selling. In order to know when to sell a stock, you absolutely MUST know why you bought it.
If you bought it because your cousin Vito told you it was gonna be bought out on Tuesday, and it doesn't get bought out on Tuesday then the reason that you bought the stock in the first place is no longer valid. Sell the stock. I'm not suggesting that anyone buy on takeover rumors but you get the idea.
Second, Do your own homework, PLEASE! Don't listen to the crowd. Today Micron Technology (MU), a stock in the RWTM portfolio, got creamed because an analyst downgraded the stock. MU is at $60....
TOM GARDNER: [email protected]?
MF DOWMAN: Don't we all wish? :)
MF BOGEY: Yeah, right! Now this MU recommendation is coming from the same fellow who upgraded the stock at $85 and said it was going to $200!!!!! He liked it at $85 not long ago and now he doesn't at $60?! The point is: Don't listen to these guys. Have your own reasons for buying and stick to them. If the company dissapoints YOU, then sell, never mind all the Gurus out there.
Finally, I hear so many times that people get out because their Uncle Jim is going to sell his 500 shares of AT&T as soon as it hits $70!!! Why??? : )
TOM GARDNER: Because he's on the board?
MF BOGEY: I never understood this mentality, selling just becuse it hits a
nominal value. Sell when it's overvalued according to your own work, not just some number you picked out of the sky. Tom?
TOM GARDNER: Three excellent rules, Bogey. Can you recap them in one-liners?
MF BOGEY: Sure:
1. Know why you're buying. Write the reasons down.
2. Do your own work. Don't depend on some Guru.
3. Never sell based on some arbitrary price.TOM GARDNER: Fantastic! OK, now I'll rattle off three quick guidelines and then we'll have about 35 minutes for questions, comments, and to talk about digital audio workstations. :(
My first rule tonight: Buy great companies. I just don't think there's a better simple lesson for individual investors than this. It's so obvious.... It seems ridiculous.
MF BOGEY: Like SNIC ; )
TOM GARDNER: Hey, I was going to say we've broken all three of these with that. . . gimme some time. :) Buy great companies. If you do, then when you buy or sell them is irrelevant. It's the finding of them that matters, not the timing of entries and exits.
Who are these great companies? I've outlined what I think are ten great companies in the Cash-Kings folder on The Fool's School board. But there are dozens of other great ones: Johnson and Johnson, General Electric---stocks that consistently compound 15-20% annually, because they're extremely well-managed, and profitable.
Number 2 Rule: Stick to the PEG and YPEG when valuing growth stocks. Don't let yourself get away from the numbers. If you need to polish up on your PEGging of stocks, drop by The Fool's School. There are hoards of Fools there waiting to help out. Again, we believe growth stocks are fairly priced, when their price-to-earnings multiple equals their forward annual growth rate. That's a good time to sell. . . particularly if you aren't looking at a very open-ended situation.
When the situation is more open-ended and/or the company is extremely profitable (read: 15%+ profit margins, loads of cash, no long-term debt), I think it's a good idea to push the earnings forward. And use the 5-year growth rate as your multiple. Getting away from the minutiae, the point here is: Stick to the numbers.
And finally, Number 3 Rule, and I think the best guide of all for selling: Set appropriate expectations to begin with. In Fooldom, we have both Beating the Dow and Investing for Growth. They're mechanical approaches; they tell you when to buy and when to sell. And if you'd followed them for the last 15 years, you'd be looking at post commission returns of 25% annually, and 28% annually, respectively. Or a double of your money every three years.
So, the selling rule here is actually sort of a buying and selling rule. When you look for stocks beyond these groups, IFG and BTD, look to beat those returns. That'll demand that you find great companies in great industries. And by doing so, you'll have eliminated any concerns, or most concerns, about when precisely to buy and when to sell (Rule #1). So my three additional rules are:
1. Buy great companies;
2. Stick to the numbers when entering and exiting;
3. Aim to beat Beating the Dow and Investing for Growth, or you've wasted your time.And that means, for the last one, that you should type those stocks (BTD and IFG) into your accounting software, and track your net-commissions-and-spreads returns against 'em to see how you're doing.
In the next segment, we'll answer to questions and comments from the audience.
2. Question & Answer SegmentTOM GARDNER: Now, let's open the floor for the SNIC assualt. Set to, Robert. :)
MF DOWMAN: Ok! ImNoAngel wants to know: Tom, any reassurances for those of us who are "Running with the Market?"
TOM GARDNER: ImNoAngel, fine question. I think this one falls into the MF Bogey rule: Know why you purchased these stocks. Nasdaq has run into a very difficult market for the tech/rapid growth issues, primarily semiconductors. I think, at the very least with this portfolio, you should track the stocks you hold against the industry they're in. If they start to *badly* underperform the group, get concerned.
But more than anything, evaluate why you hold 'em, and if you're uncomfortable with the reasons, cash, and go to a more stable, less volatile approach. There are plenty more stable, less volatile and highly-profitable approaches out there.
MF BOGEY: Tom, can I add one thought?
TOM GARDNER: Yes. But only if it supports my points. :)
MF BOGEY: I think it's very important that nobody out there be buying RWTM or Fool Port stocks simply because Fools have. Fools can be wrong, and if you aren't completely comfortable with our reasonings, then you need to do a little more investigating on your own. You should start out by being uncomfortable with the reasonings behind ANY stock recommendation. . . and then proceed with your own evaluation.
MF DOWMAN: OK. MF Master asks: I am a big believer in setting stop loss targets. I feel more people should. Why do people hestitate?
TOM GARDNER: Ok, get Master up onstage. :) Stop losses, Bogey?
MF MASTER: Hi, Fools (tap dancing and juggling simultaneously).
MF BOGEY: Well, I'm not a big fan of 'em for this reason: You are making assumptions, usually technical, about a stock's direction. And that doesn't gel to well with investing IMO.
MF MASTER: Well, obviously, I disagree. EVERYONE makes mistakes. EVERYONE can make bad picks, just things that the average investor will never be privy to. . . which can affect the outcome.
MF BOGEY: Wanna fight? : )
TOM GARDNER: All right, follow up: Master, your stop losses are set where usually
MF MASTER: Depending upon volatility of stock....7-15% below initial purchase (move up as stock does)?
TOM GARDNER: OK, Master: You just got stopped out of America Online one year ago with a loss. The market told you you made a mistake. . . but did you. That's my only gripe against stop losses.
MF DOWMAN: AlanR asks the question of the day: So how do you explain the gyrations around MU?
TOM GARDNER: AlanR. . . I'll throw up something quick and leave the rest to Bogey. I don't think investors should stand for the sorta stuff we're seeing, in the analyst recs on Micron. That is, stand for them, without holding them accountable. If Senor Whittington thinks that at $85 the stock is going to $200. Then at $60 a share, shortly thereafter, it's not a good time to buy Micron. And his reasoning seems kinda weak. Well, as *investors*, let's begin to look past this guy. It looks like price playing to me. (And we prefer to buy companies not for price movement, but based on *company* value) MF Bogus?
MF BOGEY: My feeling about MU is that regardless of DRAM pricing in the next 2 weeks, my 8MB 'puter will be 128 MB in 10 years or less. All the volatility we are seeing right now won't matter worth a darn then. I'll bet Soundview isn't looking quite that far! : )
MF DOWMAN: Huibs pht asks: How come the Gap, (GPS) is a BUY AND HOLD FOREVER in your Cash King account, but you've set a target of the low-mid 50's for the Fool Portfolio??? :) huibs..
TOM GARDNER: OK, get that yoyo up onstage.
Huibs pht: hey..
MF BOGEY: Huibs! Very proud to share a stage with the man, the myth, the legend ; )
MF DOWMAN: Huibs pht, the resident Mencken!
Huibs pht: the Idiot
MF BOGEY: Hehehehe
TOM GARDNER: No fair, Huibs.You're not allowed to read things I write at one end of Fooldom and apply them to things penned at the other end. :)
Ok, why is Gap being priced in Fool Portfolio writeups but not in the cash-king folder. Because the cash-king investor would be pleased with 17% growth annually out of The Gap over the next decade. The Fool, and there is a difference (it's called split personality), won't settle for performance that appears will underperform Beating the Dow over the long haul. We did time our entry on The Gap in Da Fool Port and we'll do some timing on the exit. Based on da fundamentals. Dig, dig. . . am I out of that hole?
MF BOGEY: Nope.
Huibs pht: I guess I'll have to buy that??
TOM GARDNER: Ok, Huibs. Your three favorite stocks here are?
Huibs pht: IOMG, AMER, and...and...and... IOMG!
TOM GARDNER: Huibs, you will be selling those. . . when?
Huibs pht: $135,...??? and.....$135.
TOM GARDNER: And if that comes to pass, Huibs. Where will Fools be able to visit you?
MF BOGEY: Caymans
Huibs pht: lol
MF DOWMAN: DJ Jazzy has a fine question: Do you have any suggestion on selling strategies for inherited stocks? Since *I* didn't buy the stocks, most of the considerations on the messages boards, etc. don't apply. Should I just consider market timing, etc?
TOM GARDNER: Great question. Bogey, yours?
MF BOGEY: Okay...I would take a look each issue in the portfolio. Do the necessary valuation work and decide if the returns that you expect to get in these stocks will be better than BTD and IFG. Then make a decision.
MF DOWMAN: Gameboy has one for da Fool: Can you talk about special situations such as turnaround plays, and "market-timing" around the time you plan to sell---when the stock becomes fairly valued?
TOM GARDNER: Gameboy, for us it's just closely tied to the PEG along with cash considerations. If the stock trends up towards a 1.00, and we see a pretty close-ended situation, we'll be looking to cash. In open-ended situations and/or with financially-strong juggernauts, we might very well be holding for dearer valuations or for the long-haul. And all this, no matter what we've made (or lost) on the investment. Dunno if that helps or no.
MF DOWMAN: Torr asks about technical analysis: What technical analysis tools do you use and why ? For example RSI, Stochiastics, BOP, Money Stream, OBV.
TOM GARDNER: Yikes. :) Bogey?
MF BOGEY: I got one : ) Okay, TA, as it is affectionately referred to, is not considered very Foolish. However, I'd be a big fat liar if I said I'd never looked at a chart...
MF DOWMAN: heretic
TOM GARDNER: Get him off the stage..
MF BOGEY: Part of the Fool philosophy...
{BOGEY KICKED OFF STAGE]
TOM GARDNER: Ohhhhhhh. Apparently Bogey has been kicked offline!
[BOGEY INVITED BACK UP ON STAGE]
MF BOGEY: Damn stage hands : ) RSI is important.
TOM GARDNER: In The Fool Portfolio, we don't use any technical indicators. In the Bogey-folio, up 1.07% compounded annually over the last three centuries, apparently he uses something called RSI. :)
MF BOGEY: TG you advocate RSI in the Primer, no? Relative Strength Indicators. . .Relative strength , listed in IBD, basically tells me if the stock is being bought by other Fools like me : )
TOM GARDNER: Oops, yes, we do use relative strength indicators. Wasn't familiar with the derned acronym!
MF DOWMAN: Ok! CEDC has a follow up question about Cash-King investing: Tom, can the 10 cash king stocks consistently beat the IFG and BTD approaches over the long run?
TOM GARDNER: CEDC, only time will tell, because this isn't backtested. Of course they have over the past five years, but that's not a fair sample size. At the very least, though, I think they can compete favorably. But more than anything, they're there for all as a reminder. Great companies, great markets, great profitability, great balance sheet----oftentimes, a great long-term investment
MF DOWMAN: If cash-king investing loses to IFG over the next decade, Tom swears he'll shave his head!
TOM GARDNER: Precisely, DowMan. :) I think Investing for Growth finds similar stocks. So we might see similar performance
MF DOWMAN: Tarczynsk asks: Tom, when doing the PEG & YPEG analysis, how do you pick analysts to forecast growth? One great analyst or a consensus etsimate? And then, how much do you believe them when the market starts to turn south?
TOM GARDNER: We use the consensus estimate, stacked up alongside our personal estimates. I do think it's worthwhile to see who out there has done the analytical work. And warning signs should go up for small stocks, with one analyst following, with outrageous growth projections, and with accounts receivable up 700% quarter over quarter alongside sales growth of 75%. :) It's just important to remember to FOLLOW the company's quarterly performance versus analyst expectations.
As for when the market goes, south. . . since we're looking at what we believe to be the greatest growth companies in America. . . I think buying opportunity. :)
Question: You base your investing strategy largely on numbers. What do you think about the interplay between management and numbers (i.e. if management gets shaken up, do you still run with the numbers)?
MF BOGEY: Well, the bottom line is always the BOTTOM LINE. If a management is weak, it will show up in the numbers. If it doesn't, then consider yourself lucky : )
TOM GARDNER: Stick closely to the quarterly reports. As individuals, we don't always get the same in-depth research that the institutions have access to. So we really have to comb through those quarterly reports. As Bogey says, weak management will showup therein.
MF DOWMAN: Rookie asks: I often buy based upon high volume with positive momentum, and bail when volume and or momemtum swings negative. Of course I only do this with stocks that I have taken a good look into. Then switch to another stock with similar chartoristics. Wrong?
TOM GARDNER: Rookie, I think that makes for a fine screen. But I think you're best off taking the one hour to get a look at the financials. Run the PEG, look at the balance sheet. When volume dies, as it has with AMER and IOMG at times, sometimes it has presented just another buying opportunity. Of a different feather. :) Boge?
MF BOGEY: Also, this type of aggressive trading plays mainly on the short-term psychology of the markets, which often has nothing to do with intrinsic value. Not to mention commission costs. : )
TOM GARDNER: Agreed, Bogey. Rookie, why not screen in stocks to buy that way. But then hold onto the great ones. :)
MF DOWMAN: MF Value asks: Why ever sell. Doesn't the market go up over time?
TOM GARDNER: Value---bless his name. Write it down and send it through wills to succeeding generations. There are plenty of stocks you just shouldn't even worry about selling. Sure, re-evaluate every year, but, I think it's a great idea to think about holding forever.
And that's an idea that a guy like MF Cubster champions again and again---that an investor's journey should really be to find ten or twelve great stocks to hold for a LONG time, even a lifetime. Rather than researching hundreds of companies and trying to call the right ins and outs. Cubster buys stocks with the aim being to find out if they're worth holding for a lifetime. Great approach.
MF DOWMAN: Alan gets in a follow-up: Given what has happpened to MU, how can you tell the difference between unintelligible hype, on any widely traded stock, and real value?
TOM GARDNER: The financials. The business. The industry. Bogey?
MF BOGEY: Agreed completely.
TOM GARDNER: Check's in the mail.
MF BOGEY: We are talking about a 30-40% pullback in a group that's up over 100%+ in a year. MU went from $3 in 1993 to $94 this year. $55 doesn't spook me.
MF DOWMAN: JakeGidde wants to know: Tom--how do you hold an analyst accountable?
TOM GARDNER: JakeGidde, we will. We just have to build that area in Fooldom. For now, we just stick to the consensus estimates and to our own projections. Sure, we're happy to see a highly ranked analyst in the group. But we don't commit to any single analyst. I would like, though, in the year ahead, to build an analyst accountability area in Fooldom.
TOM GARDNER: OK, that's all for tonight, Fools. Thanks for coming! A transcript will be available in Fooldom, shortly.
We now make the transition from selling stocks to building careers. Thanks for listening to the first half of Foolishness in The Globe Theatre. Now, the second half comes with Nick Corcodilos, proving to be the most progressive jobhunter on the planet. (Night all. . .looking forward to this one from the audience level)
3. Repeating the Six RulesBogey
1. Know why you're buying. Write the reasons down.
2. Do your own work. Don't depend on some Guru.
3. Never sell based on some arbitrary price.Gardner
1. Buy great companies.
2. Stick to the numbers when entering and exiting.
3. Aim to beat Beating the Dow & Investing for Growth, or you've wasted your time.