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And now for something completely different


Guest JackRiver

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Guest JackRiver

Okay, maybe not. 

 

Question:  I am presently thinking about buying a particular stock at a current price of 50 and decide not to buy, but five minutes after I make this decision news breaks that's very negative with regards to the company and the stock plummets to 30.  I decide to buy at 30, and five minutes later news breaks that the breaking news before was completely false and the stock shoots back up to 50.  What should I do, buy, hold, or sell? 

 

Yours

 

Jack River

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At every price point there is your expected after tax rate of return, because you bought i'm assuming you know what the rate of return is at 30,40,50 etc.  If at 50 the expected after tax rate of return is lower than the opportunity cost you gotta get out.

 

short answer is reread Ben Graham

 

 

 

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Guest JackRiver

Okay, and I follow you and let's say that the threshold was not met and that is why I decided not to buy at 50 originally, now what do I do, do I sell?  Forget about taxes, it's in an IRA.

 

Yours

 

Jack River

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If you thought $50 was a buy, then $30 is a far better buy.

 

If you thought $30 was a far better buy, did you invest more at $30 than you planned to at $50?

 

Assuming you bought the same dollar amount, or more at $30, and it's now at $50 I'd sell the extra shares purchased at the lower price and continue to hold the initial dollar amount as planned. I'd re-invest the short-term windfall in my next winner (btw, no consideration given to tax implications.

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Guest JackRiver

If you thought $50 was a buy, then $30 is a far better buy.

 

If you thought $30 was a far better buy, did you invest more at $30 than you planned to at $50?

 

Assuming you bought the same dollar amount, or more at $30, and it's now at $50 I'd sell the extra shares purchased at the lower price and continue to hold the initial dollar amount as planned. I'd re-invest the short-term windfall in my next winner (btw, no consideration given to tax implications.

 

Ericd1

 

I said that I didn't buy originally at the 50.  So I guess that means I didn't think it was a buy at 50.  Does that change your reply to me?  If it does or it doesn't, what should I do?  Please if any others can help me with this as well. 

 

Ericopoly, nobody should say I don't at least have a little bit of humor in me.

 

Yours

 

Jack River

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Say you think the company is capable of increasing its value by 10$ a share/year.  At 50$ you have a 20% ERR, at 30$ you get a 33% ERR, only reason you'd want to sell at 50 is if you could do better than 20% somewhere else. 

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Ok gotcha Jack, you were considering the purchase but didn't pull the trigger at $50...But you now own it with a $20 profit.

 

If you didn't like it before at $50, take the $ and run. If you want to second guess your initial decision then pull your initial $ out and let the rest have a free ride!

 

How about this one -- I liked GE at $18, liked it better at $10 and bought the leaps at $6. Now I'm up 67% on the leaps and down 44% on the stock. What do I do now?

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Guest ericopoly

Jack,

What did you learn from these replies? 

 

I find that it would depend on why you didn't buy at 50.  You never specified.

 

A few possibilities I will list off hand:

1) You might have been sucking your thumb at $50 as Buffett did with Walmart (don't sell it at $50)

2) It might not be as good a value upon return back to $50 as the other stocks you traded for cash to buy at $30 (sell at $50 and trade back)

3) You might have studied it very well and simply don't find it to be a good value at 50 (sell at $50)

etc...

 

 

Any answer of mine is dependent on why you didn't buy. 

 

Buffett was simply waiting for a better price with Walmart before buying a bigger chunk, but he still thought it was a buy (he says so).

 

You wrote:

 

I said that I didn't buy originally at the 50.  So I guess that means I didn't think it was a buy at 50.

 

Don't guess, be specific if you can.  Otherwise (if we're guessing) I would say, that the fact that you didn't buy at 50 doesn't necessarily mean that it wasn't a buy at 50.  It could be that you should have been buying at 50, but weren't doing so because you were anchored on getting some better price (a few percent lower), like Buffett did with Walmart for example.

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At $50 the stock was a marginal long-term investment.

 

But ... change the framework & it looks very different.

- Most would sell at $50 & take the quick $20 gain on the short-term investment. The long-term investment then gets reconsidered (wait for more certainty, sell a $50 put to reduce exposure, roll-in over multiple small purchases, etc). The $20 'risk reducing' cushion will not just bias the new decision towards purchase, but also how that purchase will be made.

- The textbook example was the day FFH fell $140+ from manipulative shorting. 50% returns in mere hours was common, & successive short-term rollovers were the norm vs the exception. If you had acted on that day, the hold decision was much easier as there was allready a substantial cash gain in place. It also allowed you to be more objective after the fact.

- Worth noting is that the 'mental accounting' is much stronger when the portfolio is concentrated - making out of the money calls or puts/margin calls more of a requirement (rude recognition that your beloved assumptions are sh*t).

 

SD

 

 

 

 

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Guest Broxburnboy

Sell, take the profit, reinvest in FFH and kiss the ground you're standing on for the opportunity to make money in such an environment.

If the stock responds so volatilely to a news item, it probably isn't a good buy and hold candidate anyway.

 

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Here's what I would do: transfer the stock to your UBS account in Switzerland and sell immediately.  The stock was obviously part of some hedge fund rumour-mongering scheme and the Feds are likely at your doorstep.  Sell your house as soon as is practicable and disassociate yourself from your hedge fund buddies.  Move to Guatemala; the current government is sympathetic towards North American white collar criminals and there is no extradition treaty with the US.  Plus, Guatemalan women are beautiful and love gringos, especially ones with hedge fund cachet.  May God have mercy on your soul.

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