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”.
- 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.
- 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.
- 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.
- 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.