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A Lesson That Passes the Test of Time



July 15, 2013 – Comments (2)

Board: SA Investing Philosophy

Author: aryan89

[This post is from our Motley Fool Stock Advisor boards, a premium service. Click here to take a no- risk free thirty-day trial of any of our services.]

One of the greatest lessons I have learned as an investor, but tend to forget occasionally, comes from one of the greatest investors history has seen, Jesse Livermore.

His lesson: "A stock is never too high to buy and never too low to sell."

Over the last few months, we have continually posted and discussed the following:

1) "Is DDD to high to buy? It's gone up over 200% since it was first recommended. I think I should take some profits."
-> The stock is at $48 now and is a BBN.
2) "TSLA is too high. The price does not justify its fundamentals. I'm going to take my profits (some people did this at $70, some at $90, etc.)."
-> The stock sits at $120 and it is foolish to speculate where it will go in the coming weeks or months.
3) "NFLX at $215 and re-recommended. Really?"

As investors, we should ask these questions. I have asked them myself. What I have learned from my past mistakes is to hold on to winners (given that the reason you invested in the company is still intact). You will only have multibaggers if you hold your winners, not by selling them and hoping to get in lower. Trying to time the market and buy low, sell high, wait for dip, buy low, sell high, is speculation and not practical. This is evidenced by the history of TSLA, DDD, and NFLX, among others.

At Fool, I read a lot about how they consider a stock's past price appreciation. A lesson I initially learned from Mr. Livermore, but tend to occasionally forget.

A prime example of this teaching is Priceline (NASDAQ:PCLN). When this stock was at $1, Goldman Sachs (NYSE:GS) recommended it. It immediately popped to $6. GS continued to make upgrades throughout the years. As we all know, David Gardner initially recommended PCLN at $23 in May 2004. It went up and up and up. He had the audacity to re-recommend it at $193 in June 2010. Can you imagine re-recommending a stock to thousands of investors when it has already gone up 700%? It is a ballsy move. This is what you call sticking by your principles and having confidence in a pick. The principles that initially made PCLN a good investment was still intact, perhaps even better. The investment moat did not change. After a few months, before the end of 2010, PCLN was over $380. Impressive right?

Well, in 2012, PCLN went over $500. Mr. Gardner definitely finished his work with PCLN right? He stuck by it twice and is up 2000% and 150%, respectively. Now, recall Mr. Livermore's lesson - "A stock is never too high to buy." Recall Motley Fool's lesson of considering strong past price appreciation. Mr. Gardner re-recommended PCLN again at $588 in August 2012. Another commitment to the investment moat of PCLN. Today PCLN sits around $892.

Ask yourself:
2) Would you invest more money in a stock you own that is up over 200%? or 2000%?
3) Would you buy a stock that has had such a steep run in such a short period of time?

A few years ago, I would have answered "no" to both of these questions. Today, I answer with a Foolish "yes".

The investment thesis that I bought DDD and TSLA on have not changed. It probably became better. So, although the prices have appreciated heavily in a short period of time, I do not plan to sell, and will consider both of these companies for new money that I will invest.

There are many companies in the Fool Universe that exemplify the story of PCLN told above (i.e. ISRG, NFLX, DIS, AMZN, AAPL, and others). History tells us that rather than trying to time the market and buy low, sell high, it is better to stick to your investing philosophies. If the reasons you invested into a company are still intact, rather than asking "Should I sell and take profits?", the correct question would be to ask, "Should I buy more?"



2 Comments – Post Your Own

#1) On July 15, 2013 at 3:11 PM, constructive (99.96) wrote:

"The investment thesis that I bought DDD and TSLA on have not changed. It probably became better."

If valuation isn't part of your investment thesis, you probably aren't going to succeed as an investor.

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#2) On July 16, 2013 at 3:33 AM, UnrealizedGains (39.93) wrote:

My message was that investing in stocks that have had high past price appreciation should not deter you from conducting fundamental analysis on them. A lot of investors were frightened to invest into PCLN, CMG, ISRG, after their initial high price appreciation. They try to buy on dip or time the market. If your goal is long-term investing, these speculative moves of trying to time when to go in could ultimately cause you to not invest at all. 

 There were people that waited for PCLN, ISRG, etc to come down before they invest into it. What happened? They missed out on the monstrous gains exhibited by these stocks in the past 5 years. 

When valuing growth companies like DDD and TSLA, a lot of their valuation depends on future earnings. I believe TSLA is only using approx. 20% of their factory now. After they start producing the Gen3 vehicle, the whole scope of their earnings potential changes. As the probability of a Gen3 launch increases, the probability of using their factory to maximum potential increases, which causes appreciation in price. Andrea James, from Dougherty & Company, mentioned that the factory is capable of $20 billion in revenue, $2 billion in net income, and about $15 EPS (assuming 10% NOPAT). They had a price target of $90 when the stock was at $30. She also mentioned that if the factory produce at full capability you could be looking at a $300 stock. These are just things to consider before you conclude that their valuation is out of hand. I wouldn't say that the people at Dougherty aren't successful investors. Would you?

 Northland Capital also increased their price target from $95 to $230. Would you say valuation isn't a part of their investment thesis because they are still long TSLA at the current price. Although the price went up, the investment thesis and valuations could still support an investment at the prevailing price. And clearly, Northland believes that TSLA has become an even better investment.

 I still stick by the message I portrayed:

 "A stock is never too high to buy and never too low to sell." - Livermore

 The message is clear: Don't avoid or sell a stock because it has run up too fast and don't buy a stock because it has gone down too fast. If the investment thesis and valuations hold at the prevailing price, then it could still be a buy.

Also, if a stock has been in a decline and the investment thesis doesn't hold anymore, rather than waiting for it to bounce back, it's probably better to get out and invest the funds in a company that more closely meets your thesis and goals.




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