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A timing example



August 22, 2007 – Comments (2)

I found an interesting example of timing's importance while reviewing some closed picks today.

Back in late June, Barron's ran a negative piece on American Oriental Bioengineering (AOB), a Chinese neutraceutical company.  The Monday following the article, I gave AOB a red thumb down, starting price was $8.75.  Later the same day, TMFOtter gave it a thumb's up at a starting price of $8.41.  I posted a reply to the pitch stating that one of us was playing the article the wrong way and time would tell.

As it turns out, we were both right.  As of today, TMFOtter's AOB pick is ahead by 11.17 points, my pick is ahead by 12.3 points.  Same stock, opposing picks entered on the same day, but both were winners.  The difference was I ended mine a month ago at $7.90 when AOB had sold off and it's recovered to $9.15 since then.

Nothing earth shattering, I just thought it was interesting that opposing picks both turned out to be winners over a two month window.

Thanks for reading and Fool on. 

2 Comments – Post Your Own

#1) On August 30, 2007 at 4:15 PM, Capsperson wrote:

Very interesting insight.  I've always thought that timing was important in making picks.  The difference in your example was that you knew when to end your pick of AOB.  Can you give any advice on ending "underperform" picks ?  Thanks.

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#2) On August 30, 2007 at 9:02 PM, rd80 (95.06) wrote:

I'm not sure I'm the best person to ask for advice on ending an underperform.  AOB is one of the rare cases where I got lucky and pretty well nailed it. Most of the time I end picks (both directions) too early and leave points on the table.

As a general rule, you would end the underperform when the situation that made you think the stock was overvalued isn't valid any longer and the stock is approaching fair value.

In the case of AOB, I really didn't know much about the company other than what was in the Barron's article and a quick glance at the Yahoo Key Stats.  The fundamentals actually looked pretty good on it, so when I had a chance to end the pick in the green, I jumped on it.

Some other examples of recently ended picks and my thinking behind them.  IBCIQ.PK, Interstate Bakeries.  I still think this company is going to zero - but, they have some very well known brands like Twinkies, Wonder, Dolly Madison, so when the pick was ahead by 15 pts, I ended the pick to protect against the possibilty, if unlikely, that someone might buy the company to get the brands. As of today, I left a lot of points on the table with this one and it's now below CAPS $100 mil threshold.

For a more relevant example, Rubio's - I've followed this stock for awhile and even owned it earlier this year, probably shouldn't have sold it.  It made a rapid climb when it crossed the $100 million market cap threshold and it just looked too far too fast so I red thumbed it. It fell, I ended the pick, it bounced and still looked over done so I red thumbed it again. It fell, I ended the pick. Then it consolidated for awhile, and I gave it a green thumb.  I don't have a good grasp on technical analysis, but that's pretty close to what I did with RUBO - I red thumbed it when the price looked too high compared to the recent trading range and valuations, ended the underperforms as the stock came down to values within it's recent range.  The outperform pick was a combination of the stock coming back to the low end of its range, coming down to a more reasonable fundamental valuation, and that I like the potential for this becoming a regional to national growth story.

In the rare cases where I trade for real like the RUBO description, I'll trade around a position - either go slightly overweight when it looks cheap and sell back to a neutral weighting as the price goes up or sell to under weight when it looks expensive and buy back to neutral as the price comes down.

Hope that's helpful.  I think the most difficult part of an investment, either real or in CAPS, is knowing when to end it.  Based on the number of points I've left on the table, it's an area where I would really like to improve.


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