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Breaking Your Own Rules

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July 14, 2011 – Comments (10) | RELATED TICKERS: SZYM

I think it's good for investors to have some hard-and-fast rules they're always conscious of... I've also recently been thinking that every once in a while, you need to have the flexibility to break them in the right circumstances.

I don't know if anybody's following the Rising Stars project here on Fool.com, but I've been participating. My latest buy for my portfolio is Solazyme (SZYM) -- here's the writeup

For years I have generally derided unprofitable companies in my articles. I'm also not a huge fan of IPO fever situations; it's often an easy way for individual investors to get caught up in the euphoria and lose a good bit of money. Solazyme's still an unprofitable company, and it's an IPO. But I decided to put some money into this one as my July purchase for my portfolio. Biofuels are fascinating, and could be HUGE down the road. This company's technology sounds very compelling. Although it doesn't have a ton of revenues, it DOES have revenues. It has some big-name customers and partners already. And unlike a lot of start-ups (like biotechs generally scare the you-know-what out of me for this reason), it doesn't come out of the gate with a whole ton of debt it took on to finance its grandiose plans. 

Anyway. Every once in a while it might be good to break one's own rules for some good reasons. I'm hopeful this company will be able to make good on the promise it shows. This was one of the exceptions to my rules. And of course the Rising Star project is particularly fun because we can put some money where our mouths are out in public and see what happens down the road. 

 

10 Comments – Post Your Own

#1) On July 14, 2011 at 7:58 AM, lemoneater (80.70) wrote:

Yes, I recently broke my own rule not buying stocks trading under a dollar when I got some shares of VUOC, but I really like the potential of VU 1 Lighting which doesn't use any mercury in its bulbs so it is a safer alternative to CFL lighting. My husband told me the science was sound since it was just a creative new application of cathode ray technology. I liked how the company was enthusiastic about its prospect, but honest about the potential of failure.

I will have to check out Solazyme. Have a great day!

 

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#2) On July 14, 2011 at 8:40 AM, catoismymotor (< 20) wrote:

I did this with FRFHF.PK last night. However instead of buying I'm selling. They were one of my LTBH darlings. To sell them is to break one of my rules. A number of factors lead to my decision to sell. The bottom line is that I am after value and growth. They no longer represent either. I see them in a holding pattern for the next five to ten years and that is not satisfactory.

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#3) On July 14, 2011 at 9:02 AM, TMFLomax (42.91) wrote:

Oooh... I love these examples of breaking your own rules, guys! Thanks for sharing them! 

lemoneater 

Not buying penny stocks is one of my rules too! But yeah, I can definitely imagine breaking them in circumstances like you described! I'll look into that one too!

 catoismymotor

I hear you on that one too... I'm committed to LTBH investing, but I did decide to sell SunPower out of my Rising Star portfolio even though it went against my natural grain. I think the "sell" decision can be a very good decision, it might sometimes be too easy to just default to LTBH and forget to watch for what the reality is. Great example!

Thanks again for bringing these up!

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#4) On July 14, 2011 at 9:22 AM, lemoneater (80.70) wrote:

@ #2 I hear you, according my cost basis, I finally decided to sell MDT since it never regained share value in all the time I gave it--more than two years. So I sold it at a substantial loss and harvested the loss for taxes.

 

 

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#5) On July 14, 2011 at 3:17 PM, TMFBabo (100.00) wrote:

I followed the "don't buy unprofitable companies" rule for a while, too. I've found that categorically dismissing every single one of them can lead to missed opportunities, though (and only recently decided to break it on my own as well). This is especially the case for small cap oil and gas, where a company can make game-changing moves that won't show up in the income statement for a while.

The more I learn, the more I'm realizing that the answer to many questions is often "it depends" rather than a clear "yes" or "no."

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#6) On July 14, 2011 at 7:49 PM, rd80 (98.07) wrote:

@ #4 - If you sold early this year, I may have bought your MDT.

I don't really have any hard and fast rules for investing.  My portfolio is mostly dividend growth, but there are a few other cats and dogs in there. 

LTBH is close to a rule, but I've got one holding I expect to be out of at the first sign of a Fed rate hike on the horizon and about a year ago I made a small merger arb trade in Allis Chalmers with a holding period that lasted over a weekend.

I think Outback's slogan applies to investing, "no rules, just right."

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#7) On July 15, 2011 at 12:15 PM, lemoneater (80.70) wrote:

@ #6 Hope MDT treats you well, Russ. They sell some excellent products and I like how the company is involved in community health education. But since I entered the stock at a multi-year high it was a leaden weight on my portifolio that even the dividend didn't make up for.

One of the simplest, yet most useful facts I've learned on CAPs is that portifolios really are individual. Two people could have the same stock, but one portifolio would be at a loss while the other was at a profit depending on when the stocks were purchased and how they were weighted. Stocks need to be considered in context of other holdings, cost basis, and personal goals.

Thanks to MF for providing a useful framework in CAPs for evaluating stocks.

Have a good weekend!

 

 

 

 

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#8) On July 15, 2011 at 4:09 PM, TMFLomax (42.91) wrote:

Thanks for all these thoughts on this, everybody!

rd80

Love the "no rules, just right" quote. :)

Have a great weekend everyone!

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#9) On July 15, 2011 at 4:29 PM, truthisntstupid (92.28) wrote:

Here's one I'll never break.

 If a company's dividend yield is significantly less than its dividend yield has been in the past, the rest of the herd can have it. I'll have no part of it.  That dividend yield will return to its historical norm.

Also, no ridiculously low dividend yields.  KO yielded less than 1% in 2000.  That dividend has grown 275% since then.

But if I buy KO now...my dividend yield will immediately be greater than the yield on cost of someone who has held it since 2000.

 

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#10) On July 21, 2011 at 6:17 AM, TMFLomax (42.91) wrote:

truthisntstupid

Never say never! Ha, just kidding. Sounds like a perfectly good rule to stand by!

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