Thursday, June 18, 1998

For What It's Worth
By Paul Belanger

Sometimes it is very difficult to be rational when it comes to buying and holding stock, especially when one is buying out-of-favor securities in the hopes of beating the market averages. It is human nature to accept popular opinion, regardless of how ludicrous it might be. So when the market price of a recently purchased stock drops significantly, it is only natural to assume that the rest of the world knows something that you do not, sell the stock in the hopes of limiting losses, and abandon any chances you may have to benefit from the stock coming back into favor. I almost made this mistake recently.

I recently bought 100 shares of The Lone Star Steakhouse (STAR) at $16 because I was convinced that it was a steal at this price. Over the past two weeks I watched the price gradually drop to $14 1/16. Perhaps the first mistake I made was to monitor the stock as frequently as I did. My first instinct was to drop this 'loser' (loser being placed in quotes to emphasize that it is only popular opinion that dictates that it is so). I talked to my wife who put things in perspective by drawing a clever analogy between buying stocks and buying antiques. Her ability to draw clever analogies, as well as her ability to recognize the value of dirty old clay pots, has always amazed me.

She reminded me that when looking for valuable antiques the best place to look is not an antique shop but a garage sale. Many people, including myself, have no idea what an old clay pot is worth. These are the people who will sell a $200 piece of Majolica for $1 in order to get it out of their attic. The select few who are able to recognize the value of an old object are often those who open antique shops. These people can determine how much an object is actually worth, and will never buy it for more or sell for less. You can usually find them spending a lot of weekend time at garage sales looking for bargains.

Its interesting how well this analogy works. Few people have the ability to value a stock fairly. Most of us will succumb to popular opinion ("that dirty old clay pot is just taking up valuable space"). Those of us who follow the crowds will end up selling wonderful stocks at garage sale prices. Those lucky few who have the ability to recognize the value of a stock will spend their weekends collecting these wonderful securities and selling them later when they are back in vogue (much like milk glass, or so my wife tells me).

So here's the lesson that can be learned from my wife's Foolish wisdom: Do not let popular opinion dictate to you what a share in a great company is worth. Whenever you see the price of one of your stocks drop and are tempted to sell, ask yourself this question: If I owned George Washington's cavalry saber, would I sell it at a garage sale for a nickel?

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