Call me lame, but I'm leaving AMBA

I’ve heard him say it a couple ways – 1) take off your money when you get a double, so you play with the house’s money, and 2) trim when you’ve got a 50% increase. So it doesn’t sound like a hard and fast rule.

Does the 50% vs 20% change what you said? It should close the gap a bit.

I have to ask why. On what basis do you sell? Just because you’re up? I’m sorry but this makes no sense to me because then you’re only looking at price and not value. This is not investing. It more like a blind squirrel that doesn’t know what it’s doing. You want to sell just because you’re up. I’ve heard other people say (these are the IBD SLIM momentum traders) that you should sell when your stock drops 8% so that you limit your losses. Another blind squirrel IMO. Sell those nuts because they are up, sell those nuts because they are down. Makes no sense. Here’s why:

As an investor, if you want to me good, you should know what your companies are worth. To understand what your companies are worth you need to know the value (what they are worth) and the price (what you can currently buy or sell them for today). To understand what they are worth you need to know some things about the company like their past performance, their markets, their competitors, the environment in which they operate, etc ,etc. From all this knowledge about the company you should really try to project forward and forecast how the business is likely to perform in the future. Your view of the future will shape your view of future earnings which is needed to get a good idea of the current value. Next, you need think about your confidence of the value (i.e. what it is worth which is distinct from the market price). Then you need to do this for all your investments and all the alternative investments (i.e. where you could invest instead of the company).

Once you have done the things in the preceding paragraph, you can make a good determination about whether it’s a smart move to buy more, sell all, sell some, or do nothing keeping in mind that you can shift around your dollars amongst your investing opportunities according to that price/value comparison of each company. This is what investing is, not some arbitrary rule based only on how much you are up or down since you purchased. Yes, you must consider the market price but only in relation to your view of the value.

One caveat is allocation. Target allocation for each stock and for each class of investment is a personal choice. For me that choice is influenced by a number of factors and it is sometimes a consideration.

Chris

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Karen, I’ve been reading your posts for a long time, and I assure you that you’re way smarter and more capable than Cramer. You ask wonderful questions, are never afraid to learn, and are always trying to reflect on your mistakes and improve.

Just turn him off. Your future self will thank you for it.

Neil

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Chris,
I just had to recommend your post.
This is exactly what we should try to achieve and forget about the speed bumps along the journey
Thank you for posting it, Erik

I have heard Cramer say that when you have a stock go up a lot, you should take some profit. No one ever got hurt taking a profit.

I’m with Neil. I almost never take profits just because a stock has risen in price. I’ll sell some if the position size has grown to where I’m uncomfortable with it. I’ll sell some if there has been significant negative news or a change in the story. etc… But if a stock price has risen because of good news, I’m more likely to add.

Saul

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I also agree with what GauchoChris wrote, I hadn’t got there when I responded to Neil’s post. The idea of selling a stock whose earnings grew well over 100%, whose trailing earnings are up well over 100%, whose revenue was up 79%, and whose PE is currently 28 — because its growth might slow down some, just strikes me as ridiculous. If it’s PE was at 28 and you heard that next quarter it might grow at 50%, and you didn’t know that was “slowing down” from this quarter, you’d think it was quite a buy.

Just saying.

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The sell stuff that has gone up is more for a short to intermediate term trader than for longer term investing. If you are just looking to catch a move in a stock then it makes sense to take your money off the table once you think the move is near completion so that you don’t give back gains.

As Saul said, when you have a good company, it severely limits your gains, and depending on your accounts could increase taxes too.

The one key to remember is don’t treat an investment like a trade and don’t let a trade become an investment. Know why you initiated the position and manage it as such. The financial media can be really confusing because they spout advice for both crowds as if it is the same and everyone gets confused.

For the companies that are still growing that I like the prospects for, I have done much better with only selling some when they got bigger than I am comfortable with. Even then they kept growing, but it was the right move from a risk management standpoint.

Selling a long term holding that is still performing well because they hit an arbitrary % gain makes little sense if the company is still cheap. Ask yourself the other side, “would I buy more here?” If there answer is absolutely not, then maybe sell some, but if you can make the case to buy more, it’s probably not a good point to sell a chunk to lock your gains just yet.

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Hi Neil,

You are so nice, thanks. I ask a lot of questions and I love asking questions, but sometimes I think I need to spend more time trying to solve the problems I put out there for thought.

Lately I have been feeling a little bit of what the real estate investors call “analysis paralysis”, although I am not really doing any real analysis of these companies. The real estate investors will say, just find a deal and buy the house and learn, stop sitting around doing nothing. And since the market has gone down a bit, I have not bought anything. I have only tried to sell AMBA but I’m still a shareholder.

Yesterday I deleted AMBA from my scorecard here at the Fool. Now I could go through life pretending I don’t own AMBA. That might be an interesting little experiment. I did not see that it was down 13-something% unless I actively put in the ticker to check a quote. How would my perspective on things change if I didn’t keep a scorecard at all here? I like it as a quick reference but it’s not really something I need. It’s more entertainment than a decision-making tool.

Karen

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Saul, I think it’s going to be very interesting to witness your investments over the next several months if the growth stocks are out of favor in the market. You’ve got incredible gains to hold you up because it’s a big lead!

I like watching what you are doing but only imitate a little bit - SKX, BOFI, SWKS (through a Fool service) and AMBA.

Karen

What I am trying to figure out is what my style is as an investor. I am not sure that I am a growth investor, or if I should lean more towards value and dividend stocks. I am glad that you are putting out this great example of very successful growth stock investing for everyone to witness and study.

Karen

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“What I am trying to figure out is what my style is as an investor”

Don’t stress on what your style is or isn’t. There will always be an exception somewhere and it can be limiting or distracting to your end goal.

I like the term Growth at a Reasonable Price (GARP), which seems pretty much what Saul exclusively does.

Also, the longer term trend of up is still in tact for many of these stocks. I know most people here don’t look at other indicators, but the 200 day moving avg is still sloping up and the stocks are above it, that is one simple piece of info to look at.

Simply, buy things that are going up and sell things that are going down. Don’t let the market shake your long term perspective with short term moves if your thesis is still in tact. You actions need to align with your time horizon. If you need the money in a few months to a year, then that is different for if you can deal with a few months of volatility.

It may help to also look at weekly or monthly charts over a longer term to give you different perspectives on what is happening in the longer term trend as well.

If the growth really slows, then the price is no longer as reasonable, so it makes sense to sell, but for now I feel much more comfortable with the quality companies here that are not crazy expensive in spite of market uncertainty.

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I like the term Growth at a Reasonable Price (GARP), which seems pretty much what Saul exclusively does.

Interesting to see you post this, as I have been wondering for a while just how to characterize Saul’s investment style. I am not sure the above comment goes quite far enough though. It seems to me that Saul is more of a HGASP investor (Hyper-Growth at a Silly Price).

I could be wrong, and admittedly I have not followed this board as closely as others, but it seems that mere growth at a reasonable price is not enough. Perhaps the most opportunity lies in the challenge in efficiently pricing hyper-growth instead. I am not sure “the market” is very good at this is or efficient at it so to speak and perhaps takes a little while to come around the proper valuation for such companies operating in a super profitable growth mode. Once a company naturally stops growing as quickly (no company can keep accelerating forever) perhaps the market has already come around to a more reasonable (ie. higher) valuation and the opportunity is no longer as compelling. By then Saul has moved on to the next such opportunity.

I have learned an awful lot on this board, and I am very appreciative of the civil discourse. Saul can be challenging without confrontational, and that is a rare and valued trait in this world. While I lack the investing acumen of many who post on this board, I do appreciate the kernels of wisdom that emerge and have already benefited greatly in my investing education. I am less drawn to unprofitable and more speculative companies now for one thing, when I see that one can have fantastic returns sticking with very profitable companies. Most of my investing is in a taxable account, so I will never have the portfolio turnover(or high returns) that Saul has, being thrilled to find a company that has a high probability of growing at 10-15% for 20 years and holding it tightly. Still, don’t mind looking for hyper-growth opportunities at a silly price when they present themselves. I also don’t fear taking a loss and moving on if I no longer like the opportunity. That is one of the benefits of a taxable account: tax loss harvesting.

Please forgive me Saul if I have mischaracterized your investing style. My intention is just to try to understand it better.

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Karen, watching the market every day can be emotionally exhausting, especially when our company stocks aren’t behaving as we think they should given the business performance. That’s when it’s easiest to begin second-guessing yourself and make mistakes. There’s absolutely nothing wrong with taking a break and walking away: I do it myself from time to time. At the end of the day, there are more important things in life.

Investing is emotionally hard, especially as a long-term investor when the market moves against you in the short-term. We all naturally want validation of, and feedback on, our decisions: we know that some will be mistakes, after all. It can be especially depressing when the market rapidly moves against you, especially when it’s a large negative move like with AMBA, because the early feedback is that it “looks” like a mistake. But short-term feedback is completely meaningless to your long-term goals, regardless of whether it’s positive feedback or negative feedback: it’s nothing more than noise. To be successful, we all have to find ways to recognize our feelings about short-term movements for what they are and set them aside. And again, maybe even taking a break for awhile if that’s what is needed to distance yourself from those emotions. Emotions will lead to mistakes (during both the good times and the bad).

The investing game is about setting out your long-term goals and then putting processes into place that allow you to cut through short-term distractions and achieve those goals. Those processes are going to be a little different for each person, as we’re all unique and have unique reactions to various situations. If AMBA is a business you want to own, then I think deleting it from your scorecard is a great move if that’s what helps you achieve your investment goals.

But first: is it a business you want to own? It’s hard to ride out rough periods if you don’t have conviction in your companies: if they’re just tickers on a scorecard. Buying a stock because you think it’s going to keep going up is a bad reason, even if Saul owns it or TMF services recommend it. Sometimes it’ll work out (and let’s be frank, with this long bull market it often has), but inevitably you’ll be disappointed if you’re buying based on short-term indicators (momentum, technical analysis, the arrangement of the leaves in your morning tea). You need to buy because you believe the company will continue to grow, reinvest in itself, and compound your capital over the long term. It doesn’t matter what the stock does in the short-term: in the long run, the share price will eventually move to at least roughly match the performance of the business.

Apple once again serves as a great example. While the business was never impaired, and management repeatedly explained exactly what was going to happen in the business and why (for multiple quarters ahead of time), the stock nevertheless dropped from nearly $100 (split-adjusted) in September, 2012 down to $61 – losing nearly 40% of its value – and took two years to fully recover and begin moving on to new highs. Two years! During a bull market! And what was it that finally turned the stock meaningfully around? A stock split! Something that had absolutely nothing to do with the business at all. If that doesn’t tell you how utterly irrational markets can be, I don’t know what will. You’ll drive yourself crazy worrying about what it all means for your investment, because there is no meaning.

When you buy a company, you need to be prepared that it will fall hard and stay low for an extended period of time, regardless of what the business is doing (and regardless of what you think the market should be “pricing in”). And as the Apple example shows, it doesn’t matter how high-quality the business is, or how bit it is, or whether it pays a dividend, or anything else: there is no escape from the market’s occasional bouts of insanity.

It could very well take a year or two for AMBA’s stock price to recover. Or it could happen next quarter (or even sooner). I have no idea. I don’t think you can even worry about it when you make a decision to buy.

Finally, one last point: we all know we’re going to make occasional mistakes with individual purchases, and so it’s easy to focus on those individual companies, but what matters to our wealth is how our portfolio as a whole is doing. The good news here is that the math is on your side. Here’s a quote from Peter Lynch in his book One Up on Wall Street (great book if you haven’t read it):

My clunkers remind me of an important point: You don’t need to make money on every stock you pick. In my experience, six out of ten winners in a portfolio can produce a satisfying result. Why is this? Your losses are limited to the amount you invest in each stock (it can’t go lower than zero), while your gains have no absolute limit. Invest $1,000 in a clunker and in the worst case, maybe you lose $1,000. Invest $1,000 in a high achiever, and you could make $10,000, $15,000, $20,000, and beyond over several years. All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out.

If you don’t cut off your winners at the knees, that is.

So try not to stress about the individual companies, especially if you have conviction in the business. I know that’s easier said than done, but try to accept that you’ll be wrong some of the time and make a lot of mistakes along the way: the good news is that you can be wrong a lot and still do very well. I can’t even count the number of mistakes I’ve made, and continue to make (sometimes the same ones over and over – I’m dumb that way), and yet I still have trounced the market over the long term. Believe me, if I can do it, anyone can. It just takes time and an occasional willingness to step back and focus on the big picture.

Ok, enough rambling. I know you’ll do just fine, Karen, even if it seems a bit overwhelming right now. But do yourself a favor and turn off the talking heads.

Neil

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Simply, buy things that are going up and sell things that are going down.

This made me giggle. It is just to close to the classic Will Rogers quote:

“Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.”

DT

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It seems to me that Saul is more of a HGASP investor (Hyper-Growth at a Silly Price).

Hi commoncents

:wink:

Saul

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And when I consider everything I own, I think AMBA is the riskiest stock in the mix… I’d rather have 10k in my pocket than 115 shares of AMBA. That’s a fair trade.

I don’t know if I will be out of AMBA or not with the market today but I still will have made a lot of money on it because I started with it …a long time ago, when the stock was in the 20s.

I’m feeling a want for more stability and less sexy.

Karen,

You have received a lot of support from this board for staying in AMBA. Seems the general populace here is comfortable w/current market volatility, comfortable w/buying now, and/or staying in.

Based on what you initially posted, here is a quote, tho not exact, credited to Louise Yamada.

“There are two kinds of loss. Loss of capital and loss of opportunity.
There will always be another opportunity, if one has preserved their capital.”

Just a thot.

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If that doesn’t tell you how utterly irrational markets can be, I don’t know what will.

This though goes back to at least Keynes who said: “Markets can remain irrational a lot longer than you and I can remain solvent.” but it’s wrong. For a market to be rational in the sense Keynes means, stock prices would have to be joined at the hip with the underlying company’s performance and its prospects, it would require the market to be efficient. Speculation would be futile. That’s not how it is. But that does not make the market irrational, it just has a logic of its own.

The stock market is an “emergent entity” that arises from joint stock laws. Emergence was originally seen in biology. The oxygen in our atmosphere was created by anaerobic bugs but you don’t expect climate to be linked to the fate of the bugs. The atmosphere takes on a life of its own. Stock prices are somewhat linked to the underlying company’s fate but it is a loose linkage. The range of indicators like Price to Sales and Price to Earnings is huge to the point that some people call them irrational. But it’s not the indicator that’s irrational but the investor who paid the price.

I’m a firm believer that it is useful for investors to study markets qua markets and the behavior of prices in addition to studying the underlying companies. This in addition to taming one’s emotions as nevercontent suggests. One way of doing that is to understand how the market works.

If you are interested in emergence, which I find fascinating, read Stuart Kauffman, my favorite complexity scientist.

https://www.google.com/search?q=emergent+entity+stuart+kauff…

Denny Schlesinger

Where I disagree with Kauffman is his recanting atheism

Kauffman recants atheism, November 29, 2009
By Individual Investor (that’s me)
http://www.amazon.com/gp/customer-reviews/R219O9LWWPCNRF/ref…

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I’m a firm believer that it is useful for investors to study markets qua markets and the behavior of prices in addition to studying the underlying companies

Denny, do you have some book suggestions for the markets and price behavior? (I’m very familiar with emergent behavior).

Neil

Neil:

The book about markets and prices that I would like to read has yet to be written. What I know or believe to know about markets and prices is a distillation of 20 years of reading books and articles and interacting with discussion boards. If you are familiar with emergence you are way ahead of a lot of professionals.

The first thing to know is that economics, hence markets and prices, don’t work like Newtonian physics. The reading should be directed towards complex systems, emergence, and evolving (learning) fitness landscapes.

  • Stuart Kauffman: At Home in the Universe and lots of lectures available on YouTube on concepts like the adjacent possible

  • Brian Arthur and the Santa Fe institute on path dependence and increasing returns

A good market specific book is Reinventing the Bazaar by John McMillan

Nassim Nicholas Taleb on Black Swans. Benoit Mandelbrt’s The Mis-behavor of Markets

Option Volatility and Pricing by Sheldon Natenberg

You might want to start with my Email to Stuart Kauffman re Reinventing the Sacred. It’s about how people in totally different fields can come to similar ideas:

http://softwaretimes.com/files/email+to+stuart+kauffman+r.ht…

At TMF the strongest influence on accepting prices as purveyors of valuable information is the BMW Method board. Not isolated quotations but series of prices as in price charts but not most of the traditional “indicators.”

Another consideration is the systemic nature of markets, things like wealth distribution and growth rates (the "S"curve).

Why Does the Average Mutual Fund Underperform?

http://softwaretimes.com/files/why+does+the+average+mutua.ht…

That should keep you busy and out of trouble for few days :wink:

Denny Schlesinger

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For those totally unfamiliar with the Science of Complexity I recommend the highly entertaining and non-scientific Complexity, The Emerging Science at the Edge of Order and Chaos by M. Mitchell Waldrop

http://www.amazon.com/COMPLEXITY-EMERGING-SCIENCE-ORDER-CHAO…

This was my introduction to the subject.

Denny Schlesinger

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Neil,

If you haven’t already read it, here’s a book that might interest you that gets at markets and price behavior, among other things: The Origin of Wealth by Eric Beinhocker

http://www.amazon.com/The-Origin-Wealth-Remaking-Economics/d…

For board commentary on the book, see:

http://discussion.fool.com/evolutionary-thinking-27543567.aspx?s… (great post by Mike Klein – his recommendation spurred me to read the book)

http://discussion.fool.com/mike-the-origin-of-wealth-27789689.as… (nice perspective from Denny)

http://discussion.fool.com/the-origin-of-wealth-by-eric-beinhock…

Also, if you don’t have a background in complex systems, and in between raising kids, fleeing fires, your job, and the myriad of other things you do…you might enjoy taking one or more online courses at Complexity Explorer. The courses are free and you can spend as much or as little time as you wish on each section, or even skip sections. Melanie Mitchell’s Introduction to Complexity has an interview with John Rundle (Econophysics) that you might enjoy. You also get a chance to use NetLogo to do your own agent-based modelling. Fun stuff.

http://www.complexityexplorer.org/online-courses/courses

Enjoy!

Ears

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