Catch a falling knife?
Days like this are what makes me wish I had more cash on hand, while at the same time making me fearful of what I would do if I did.
The old stock market adage, "never try to catch a falling knife," is an apt one -- articles from various folks on just this topic are here and here -- but unfortunately, the urge to try is one of my weakest characteristics as an investor. Two cases in point today:
Shanda (SNDA), which I've written about before and which is one of my favorite Chinese companies, is falling for reasons I can't easily discern, and after climbing up above $40 for a little while after I purchased it it has now fallen down to near my original purchase price of $32. And that's in just a little less than two months. Business seems to be good, earnings should be quite strong when they're released, and the valuation makes it quite a bargain in my opinion -- forward PE of 16 for a company that's expected to have AT LEAST 30% annual growth going forward?
This one is always pretty volatile, so a 20% move over two months may not be a big deal, but it gets me itching to buy when it drops this far and I don't see a good reason for the drop -- although politics and competition are certainly always threats, SNDA is still the biggest force in the market and Chen Tianqiao is an icon of Chinese success. But I have to keep reminding myself, let it fall and watch for a while, don't buy just because it's cheaper than it used to be. Reconsider the fundamentals. Try to figure out why it's falling. Wait and see whether someone knows something you don't know. But also don't necessarily believe ridiculous claims like this one that "Shanda should do well because Microsoft and Marvel both also think massively multiplayer online games are a good idea."
And the other one that's collapsing as I type this is FARO technologies (FARO). This is a great company, in my opinion, with a spectacular product and very strong management. I first found out about them when they were a Motley Fool Hidden Gems recommendation back when I subscribed to that newsletter, and I really like the story. I have a full position already, but the hiccup in quarterly sales that they just announced has dropped the shares by about 14% last time I checked -- I want more!
FARO basically designs and sells computer aided design and measuring equipment -- notably the FARO arm, their signature product that allows extremely precise laser guided 3d measurement. They sell all over the world, and are even planning to build manufacturing capacity in Asia to meet the rising demand for their products there. Boeing just ordered 10 of the Arms, which was released along with the sales press release as perhaps a way to soften the blow.
This is one where I really might try to catch the knife, since it really appears to me as though they are falling just becauase of a little softness in the quarterly sales -- they still have a solid backlog of orders, and they have not changed their annual guidance (though this sure makes it tougher to make the annual numbers, as Bill Mann at the Fool wrote today), but some sales moved from Q2 to Q3. They are going to stop issuing these kinds of sales updates, probably with good reason, and they are going to only issue annual guidance, not quarterly, going forward. I like both of these decisions a lot.
But I am trying to be disciplined, so I am trying to wait.
You see, I've had some bad experiences. I bought Ebay when they surprised everyone this winter with bad growth numbers, just because I loved the business and thought they would come back. I ended up selling it a little while later because I thought other businesses, including Google, were more likely to grow my money.
I bought Overstock when they surprised everyone on the downside this winter as well, and I'm still holding but the chunks I bought at $58 and $53 are well underwater. I kept buying the falling knife later on, catching some in the $30s as well, so I'm close to even over all. Same with Provide Commerce -- another business I love, bought at $34 before they disappointed with Valentine's Day, then bought more as it fell at around $18. At the top of my writeup on Dreamworks Animation you'll note that I bought once before the troubles began this winter, then again after the Shrek 2 DVD problems pushed the price down to $31 ... but if I had waited, I could have picked up some today for $23. I still like the company in the long term and am holding, but I can't justify increasing my position any more even though it's now on even more of a sale (and who knows, maybe it will go down again after Wallace and Gromit this fall and I'll be tempted again).
The experts say that you should wait for a stock that's on a precipitous decline to "settle" and display a "bottom" before you buy in because it's on sale. I respect the opinion, and I understand that it comes from years of studying charts, but that smacks too much of technical analysis for me. I don't understand candlesticks or stochastics, and I never intend to, and the only bottom I really can pick out of a lineup is my own -- if I see a company go on sale that I already own or that I'm interested in, it really really really makes me want to buy in. I'll try to avoid buying the day that it falls and wait to see if the coming weeks will make it more of a bargain, but psychologically I think I'm more afraid of missing a bargain than I am of making a mistake and buying too high -- after all, these are companies that I really admire and believe in long term, so I have some faith that it will work out in the end -- especially in the case of FARO, where I think I understand why it's falling and am fairly confident that the market is overreacting.
So while I'm trying to be disciplined and wait for stable prices and the end of the decline (though if it was easy to pick the bottom, we'd all be rich), too much discipline really takes the fun out of this -- and if it's not fun why not just buy an index fund? I'll post any changes that I can't resist making to the portfolio, so all will be able to see if I'm an idiot.
Technorati tags shanda, SNDA, Chen Tianqiao, FARO, knife
The old stock market adage, "never try to catch a falling knife," is an apt one -- articles from various folks on just this topic are here and here -- but unfortunately, the urge to try is one of my weakest characteristics as an investor. Two cases in point today:
Shanda (SNDA), which I've written about before and which is one of my favorite Chinese companies, is falling for reasons I can't easily discern, and after climbing up above $40 for a little while after I purchased it it has now fallen down to near my original purchase price of $32. And that's in just a little less than two months. Business seems to be good, earnings should be quite strong when they're released, and the valuation makes it quite a bargain in my opinion -- forward PE of 16 for a company that's expected to have AT LEAST 30% annual growth going forward?
This one is always pretty volatile, so a 20% move over two months may not be a big deal, but it gets me itching to buy when it drops this far and I don't see a good reason for the drop -- although politics and competition are certainly always threats, SNDA is still the biggest force in the market and Chen Tianqiao is an icon of Chinese success. But I have to keep reminding myself, let it fall and watch for a while, don't buy just because it's cheaper than it used to be. Reconsider the fundamentals. Try to figure out why it's falling. Wait and see whether someone knows something you don't know. But also don't necessarily believe ridiculous claims like this one that "Shanda should do well because Microsoft and Marvel both also think massively multiplayer online games are a good idea."
And the other one that's collapsing as I type this is FARO technologies (FARO). This is a great company, in my opinion, with a spectacular product and very strong management. I first found out about them when they were a Motley Fool Hidden Gems recommendation back when I subscribed to that newsletter, and I really like the story. I have a full position already, but the hiccup in quarterly sales that they just announced has dropped the shares by about 14% last time I checked -- I want more!
FARO basically designs and sells computer aided design and measuring equipment -- notably the FARO arm, their signature product that allows extremely precise laser guided 3d measurement. They sell all over the world, and are even planning to build manufacturing capacity in Asia to meet the rising demand for their products there. Boeing just ordered 10 of the Arms, which was released along with the sales press release as perhaps a way to soften the blow.
This is one where I really might try to catch the knife, since it really appears to me as though they are falling just becauase of a little softness in the quarterly sales -- they still have a solid backlog of orders, and they have not changed their annual guidance (though this sure makes it tougher to make the annual numbers, as Bill Mann at the Fool wrote today), but some sales moved from Q2 to Q3. They are going to stop issuing these kinds of sales updates, probably with good reason, and they are going to only issue annual guidance, not quarterly, going forward. I like both of these decisions a lot.
But I am trying to be disciplined, so I am trying to wait.
You see, I've had some bad experiences. I bought Ebay when they surprised everyone this winter with bad growth numbers, just because I loved the business and thought they would come back. I ended up selling it a little while later because I thought other businesses, including Google, were more likely to grow my money.
I bought Overstock when they surprised everyone on the downside this winter as well, and I'm still holding but the chunks I bought at $58 and $53 are well underwater. I kept buying the falling knife later on, catching some in the $30s as well, so I'm close to even over all. Same with Provide Commerce -- another business I love, bought at $34 before they disappointed with Valentine's Day, then bought more as it fell at around $18. At the top of my writeup on Dreamworks Animation you'll note that I bought once before the troubles began this winter, then again after the Shrek 2 DVD problems pushed the price down to $31 ... but if I had waited, I could have picked up some today for $23. I still like the company in the long term and am holding, but I can't justify increasing my position any more even though it's now on even more of a sale (and who knows, maybe it will go down again after Wallace and Gromit this fall and I'll be tempted again).
The experts say that you should wait for a stock that's on a precipitous decline to "settle" and display a "bottom" before you buy in because it's on sale. I respect the opinion, and I understand that it comes from years of studying charts, but that smacks too much of technical analysis for me. I don't understand candlesticks or stochastics, and I never intend to, and the only bottom I really can pick out of a lineup is my own -- if I see a company go on sale that I already own or that I'm interested in, it really really really makes me want to buy in. I'll try to avoid buying the day that it falls and wait to see if the coming weeks will make it more of a bargain, but psychologically I think I'm more afraid of missing a bargain than I am of making a mistake and buying too high -- after all, these are companies that I really admire and believe in long term, so I have some faith that it will work out in the end -- especially in the case of FARO, where I think I understand why it's falling and am fairly confident that the market is overreacting.
So while I'm trying to be disciplined and wait for stable prices and the end of the decline (though if it was easy to pick the bottom, we'd all be rich), too much discipline really takes the fun out of this -- and if it's not fun why not just buy an index fund? I'll post any changes that I can't resist making to the portfolio, so all will be able to see if I'm an idiot.
Technorati tags shanda, SNDA, Chen Tianqiao, FARO, knife
This article posted by One Guy @ 7/19/2005 10:31:00 AM 0 comments
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