"When to buy?"

I’d like to share something that might initially seem Off Topic, but I believe is On Topic so I ask the board managers for a little latitude as I try to quickly get to my point.

This board offers excellent suggestions on how to evaluate companies: we read the recommendations from Motley Fool, Seeking Alpha, Bert Hotchfeld, Peter Offringa, and other trusted sources. We do the research and analysis ourselves: we scrutinize the financials of the previous quarter and previous years, (if data is available), we read the earnings call transcripts, we run it through Saul’s Criteria, we read board posts from Saul, Muji, Bear, and others, and other evaluations and everything checks out. So we decide the company is strong and we want to buy in, but the question I often ask myself is: ,“Is it a good time to invest in this company, now, given the stock has appreciated so much over the last few months or so?” This is the time-honored question of valuation, which has also been discussed a lot on this board. I offer the following personal experiences with the hope that my experiences might help someone struggling with this question.

Aside: I recently did a review of my taxable and nontaxable investments and realized I had about 5% of my retirement portfolio that I forgot about (embarrassingly), much of which was sitting in fund that tracks the S&P500 and a savings account earning 0.01% APR. This amount represents a relatively modest amount of my overall retirement portfolio so I thought I would use these funds to see if I could do better than the market, using the principles discussed on this board. The “problem” I had was that I “found” this money after most of the companies discussed on this board have realized significant gains….

So I did the work and decided I would allocate a reasonable % of this “new found money” to invest in FSLY, CRWD, DDOG, ZM, LVGO, AYX, COUP, OKTA, and DOCU. Following Saul’s suggestion, I took modest positions in each of them at various points in time over the course of several weeks (beginning in May). In the timing of my purchases, I realize that not only was my timing bad, it could-not-have-been-worse, when looking back, which is an important distinction – looking back at the time you buy is all you can do – you can’t look forward. I realized I bought at precisely the local maxima for most of my purchases, which statistically, was really incredible! Like I know you can’t time the market but ‘man’, can you time it any worse that I did?!

Take FSLY, as an example: I bought some shares when the share price was around $81 per share, (on June 23rd). Imagine my concern as the share price promptly dropped ~11% to $72 a few days after my purchase. I was comforted when I checked news, the board, etc. and didn’t find any material news on the drop, but man, my timing could not have been worse, looking in the past, (because that’s all you can do). I was pleased when it came back to ~$87, on June 26, and bought some more, only to see it drop ~10% again, settling at $77 on 6/29!

I’ll spare the gory details on my other purchases but suffice to say that the same thing happened several times.

But, as of today, they are all up, some more than others, but all are up. Does that mean they will continue to appreciate? Nope. Could they decline significantly in the future? Absolutely, yes. What’s my point? While it requires research, insight, and some art, to understand the quality of a company, it’s often really, really, difficult to understand when to invest in them. Below are a few suggestions that have helped me comprehend these challenges and move forward and not be paralyzed by “analysis paralysis”.

  1. Use the timing of Motley Fool’s recommendations (and other sources) as an independent source of information to help inform when to buy. As an example, as of today (7/12) MF has recommended two of the nine companies in my list very recently, after they’ve run up significantly. This helps my conviction that a trusted source also believes the company is a good investment, at least in the longer term. My subscription in MF is well worth the price just for this aspect.
  2. Use the board, Motley Fool, or other sources to understand why a company might have dropped. Many times, it’s just noise. For companies with a small float, it might mean an institution sold a small % of their position because of cash needs, or other aspects not related to the company’s health or future prospects.
  3. This underscores the reality that Saul has preached: The Market is Inefficient. In business school, (in the finance and investment courses we took), we are often taught the theoretical idea that the market is 100% efficient and every bit of info is priced in immediately. This obviously is not correct. For example, when a company has a great quarterly announcement, the stock typically bounces after the announcement, (maybe even a day before the announcement as news trickles out). If the market were 100% efficient, the stock would bounce immediately after the announcement and stay relatively flat until there was new information available. If we look at FSLY as an example, they had a great quarterly announcement on May 6, 2020 and their share price appreciated about 50% on May 7th. Efficient market theory suggests very little action after that but before the next earnings call, but it was up another 29% over the next 2 weeks, and significantly more after that, all days after the May 6 earnings call. What’s the takeaway here? When a company has a “good” quarterly announcement, that’s an affirmation of the research you did suggesting it was a good investment. It might be prudent to make an additional purchase, (even a day or few days after the announcement), because they are telling you, “the story is still good”. When a company has a “bad” quarterly announcement, understand why. As mentioned on this board, it might be due to the missing an earnings estimate, which might be because companies sandbag and give low estimates and the analysts say “Good earnings, but disappointing estimates for the next quarter. We’re downgrading them from a buy to a hold.” In that case, it might be a time to buy more, if you are able. But the “bad” earnings report might be more “structural” in nature, like a revenue decline when their competitors saw a revenue increase, losing market share, etc. In that case, it might make sense to reduce your position or sell the entire position.

a. This also underscores the challenge to knowing how patient one should be about an investment. This is a hard one to answer, with any particular quantification. It really depends on the individual.

  1. Taking a relatively modest position in a company may make it a little easier to make subsequent purchases, if the story remains compelling. You might feel badly that you didn’t invest more, earlier, but this is probably better then feeling badly that you invested more than you should have and the investment floundered.

In summary, knowing “when” to buy is difficult and it’s really a judgment call. The same can be said of knowing when to “sell”; how patient should we be, especially when the story remains compelling. Using tools available, including the timing of MF recommendations and others’ recommendations, and the information provided on these boards can help assuage that anxiety associated with answering the question of when to invest and sell. But, it doesn’t guarantee success. At the end of the day, the outcomes remain uncertain.

I hope you find this useful.
Gary

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but man! Can you time it any worse that I did? Take FSLY, as an example: I bought some shares when the share price was around $81 per share, (on June 23rd). Imagine my concern as the share price promptly dropped ~11% to $72 a few days after my purchase.

Gary, you poor guy, so at the current price of $94.91, you are only up 17.2% in two-and-a-half weeks. (And that was after it had already been up 27% from your purchase, one day before. Oh, you poor fellow, we feel so sorry for you.:grinning::grinning::grinning:

Gary, here is the way to think about it. You are buying this company (and any of these companies, not for the next week, but because you hope they can triple or quadruple before you need to exit. You did right and BOUGHT it. If it gets to $300 or so, I can guarantee you that you won’t remember or care if you bought that first lot at $81 or $75 say. You are buying a piece of a company here, a company that you think will do very well. The stock may bounce but keep your eye on the company.

We all have bought stock at the wrong time. Look, about a year ago I bought a lot of stock in Crowdstrike at about $86. It dropped a bunch last fall with all our stocks and I bought a huge amount at $47 to $52, building it to one of my largest positions. You were worried about a $9 drop in Fastly. Crowd was down about $36 for me. But the company Crowdstrike was doing better than great, irrespective of what the stock CRWD was doing.

Then in the Pandemic scare in March, it briefly (one day) dropped to $33. That’s $33 from my original purchase price of $86. Down 62%! But the company Crowdstrike was still doing better than great, irrespective of what the stock CRWD was doing! I bought more at $47 and more at $56 on the way up, and then a little more last month at about $103. It’s now (Friday’s close) at $117 !!! And closed at another all-time high. It’s how the company is doing, not the stock !!!

Relax, you can’t worry about day to day fluctuations!!!

Best

Saul

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I know Saul already responded, but…

While it requires research, insight, and some art, to understand the quality of a company, it’s often really, really, difficult to understand when to invest in them.

It is only as difficult as you choose to make it. If you are going to torture yourself about whether to buy at 75 or 81, that is your prerogative, but you are introducing the difficulty by worrying about it in the first place. Once I get over the hard part, deciding if I want to own it, I buy it. That is one aspect of investing where what I learned from the TMF paid services is in agreement with what I have learned from Saul.

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"Look, about a year ago I bought a lot of stock in Crowdstrike at about $86. It dropped a bunch last fall with all our stocks and I bought a huge amount at $47 to $52, building it to one of my largest positions. You were worried about a $9 drop in Fastly. Crowd was down about $36 for me. But the company Crowdstrike was doing better than great, irrespective of what the stock CRWD was doing.

Then in the Pandemic scare in March, it briefly (one day) dropped to $33. That’s $33 from my original purchase price of $86. Down 62%! But the company Crowdstrike was still doing better than great, irrespective of what the stock CRWD was doing! I bought more at $47 and more at $56 on the way up, and then a little more last month at about $103. It’s now (Friday’s close) at $117 !!! And closed at another all-time high. It’s how the company is doing, not the stock !!!

I usually like to write a post with a technical bearing but felt it was important to post this for three reasons.

#1. There are investors who believe in market timing and approaching stocks with traditional valuation metrics; I’ve yet to see their success in the long term ( please reply to this thread if you’ve equaled or beat Mr.Buffet in the past 40 years).

#2. Either some posters haven’t read what this board is all about OR Saul is too kind and has a degree of patience ( that I wish I had ) to explain to each poster on how his principles work. That being said, I understand that there are many technical minded fools on this board but…"I feel good enough to say that I’ve worked for MSFT as a developer for many years and during that time released a lot of software that many of you may be using while reading this post. My job at MSFT has been rewarding. HOWEVER my best investments during the past 12 years have been NFLX, AMZN, AAPL; all recommenced by the Motley Fool when I started investing seriously in 2007/2008.

#3. Listen to those who have performed better. Since I’ve followed Saul’s board for the past 1.5 years, I managed to move most of of my investments to the high growth stocks discussed here. It wasn’t an easy task (if you have a conservative risk mindset). I had to remember and think hard why NFLX, AMZN, AAPL are where they are today; that made my work easy to invest in the future…

Cheers!

ron

long < ZM, DDOG, CRWD, FSLY, OKTA, NET, AYX, LVGO >

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Saul,
Your post is again a good reminder that all this daily/weekly swings are essentially short term noise. In fact, we are still not out of Pandemic volatility period, there is still enough scare in the market for a 2nd wave. So every other week there has been significant swings in either direction.
And similar to the March drop, i expect if a 2nd wave does ring in, the stocks recommended on this board might drop in the short term but again would RISE strong, because they would benefit even more with the ‘locked in/social distancing’ state. But regardless given the long term outlook, all buying opportunities imo.

Anyways, I am in no position to say much here. You guys are all way more experienced and knowledgeable than me. I am very new to this and to your board. Have tried it before and failed miserably because my process/foundation wasn’t right so super glad I found this board and been great learning so far.
I absolutely agree that “Timing” the buy-ins is super tough and one could loose lot of sleep over this.
But one question I have for you.
One of your comments on this post sort of resonates with your comments in your KB (Part1). So i’d like to take the opportunity to get better understanding.

I look for a company that has a long way to grow. A company that I can hope will at least triple or quadruple. I’d never buy a stock at $45 hoping it will get to $55. I wouldn’t buy a stock at $45 unless I though it could get to $150.

How can one forecast that future share price? When you say, you wouldn’t be interested in a $45 stock unless you thought it could get to $150. What metrics can help you guide to that?
(NOTE - I am assuming that this stock on your radar at $45 meets all your other buying criteria such as rapid revenue growth, recurring rev, 100+ Dollar-based NRT, low debt, niche, etc,. What I understand is that if the company didn’t meet all or most of the above, you wouldn’t bother with the stock in the 1st place)

So, Is the forecast based on the TAM? Based of current Revenue Growths? Is there any guidance you can provide that how does one forecast?
I couldn’t find much on the board that answers this directly, but i have seen many people posts saying such things “based on this similar revenue growth rate, i envision to be ‘$x’ price end of the year”. So is that based on Price/Sales?

Thanks
Really appreciate all your shared knowledge on this board.

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I look for a company that has a long way to grow. A company that I can hope will at least triple or quadruple. I’d never buy a stock at $45 hoping it will get to $55. I wouldn’t buy a stock at $45 unless I though it could get to $150.

How can one forecast that future share price? When you say, you wouldn’t be interested in a $45 stock unless you thought it could get to $150. What metrics can help you guide to that?

Hi iCAAN, This is ordinarily an off-topic subject, but I’ll respond because I believe that the top quote above (from the Knowledgebase) is one of the keys to successful investing. The point isn’t to forecast a future price. The point is you are buying a great company for the long term, not speculating that a stock that you bought at $27 will go to $28 in a few days, and then you will sell it. You don’t buy with an exit point. You buy to hold as long as the story holds up. This usually does mean buying a company that is growing fast, has high gross margins, has a lot of room to grow, and is a company in which YOU have confidence.
I hope that this helps,
Best,
Saul

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The problem I have with the idea of buying on a dip is that it implies that there is loose uninvested cash sitting around doing nothing … either that or I have to figure out something to sell.

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The problem I have with the idea of buying on a dip is that it implies that there is loose uninvested cash sitting around doing nothing … either that or I have to figure out something to sell.

Yes! This is exactly what I was thinking as well. This is especially true in accounts that you have no more money flowing into each month or year…

So how do one balance buying the dips when you have all your money invested…especially when all SaaS stocks seem to go on sale at the same time (as in a sector sell off)? So if you trim positions to buy more…then you are having to sell when all your stocks are down that day.

Until I learn more on how to do this, I am keeping a small portion of my accounts in cash. lol.

also this probably off topic too, but does anyone have tips on how to get notifications of your stocks dropping so I don’t have to be in front of my computer all day or on my phone? Was out gardening this morning and afterwards saw that ZM went down to $240. Ugh. Thanks

Thanks again to everyone who contributes to this forum. Shep.

This is clearly veering into portfolio management, which if off topic here. However, it’s a smoking fit over at this board:

https://discussion.fool.com/portfolio-management-100153.aspx?mid…

For new readers, the Portfolio Management board is the perfect place to post general questions that don’t apply to specific companies discussed here.

Thanks for your cooperation.

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Stocknovice,

Thanks for letting me know! I will venture over there and see what storm is a brewing! I can only imagine! lol.

So much to learn…

God bless,
Shep.

also this probably off topic too, but does anyone have tips on how to get notifications of your stocks dropping so I don’t have to be in front of my computer all day or on my phone? Was out gardening this morning and afterwards saw that ZM went down to $240. Ugh. Thanks*

You can set up watch lists and alerts to be notified via email when any stock you’ve named varies by more than a fixed percent. Vanguard and Schwab have this available on site which means that Fidelity must.I am sure others providde the same service.

Definitely OT

Cheers
draj