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Author: OldIronsides Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 15589  
Subject: Re: Why I'm Still Holding Onto Yahoo! Date: 11/16/2001 12:54 AM
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bearcatjim:

I hate to sell at the bottom, too. But like you, I have done so many times. In the vast majority of those cases, the "bottom," in fact, turned out not to be the bottom--the stocks fell even further, sometimes by an enormous amount. (Yes, I've made many mistakes--I'm learning as I go!) So far, I only would have made my money back plus interest on one of the stocks I sold if I'd held onto it through its post-purchase plunge. (I continue to track stocks I've owned even after I sell them, to try to learn from my mistakes.) As a rule, I've sold more losers than winners, trying to follow Peter Lynch's advice to cull your weeds while leaving your flowers alone. (Lynch says most investors sell their winners after a short run, while holding on to their losers in the hope that they'll return to at least breakeven. He calls this tendency a mistake--"Picking your flowers and watering your weeds.")

Even so, I learned early on that I couldn't simply sell because a company ran into serious problems post-purchase and its stock plunged as a result. In each case I had to make a considered judgment as to whether I thought the company was such that it possessed the potential to work through its problems and still achieve meaningful share price appreciation thereafter--even if this took some months or years to accomplish. (For me, "meaningful price appreciation" means eventual compounded annual growth in share price equal to or in excess of what I could have made in a 3- to 5-year certificate of deposit over the same period of time--the place where I otherwise would have parked my money.)

Real-life business is just a lot dicier, more complicated, and less predictable than investors (or analysts or journalists) tend to think. You have to give companies room to breathe. That's why I don't feel comfortable simply applying the Rule Maker criteria to Yahoo! now, during an obvious period of difficulty, and saying, "Dump it!" the way David Forrest does. (There is nothing inherently wrong with David's method. He may well turn out to be right, and I turn out to be wrong. There are a million different ways to approach investing. It's just that I can't comfortably apply that method myself.)

Taking all of the facts and circumstances into account, I feel that I can't make an intelligent judgment about Yahoo!'s long-term potential until ad spending returns to normalized levels, so, barring some huge misstep or disaster in the meantime, I intend to wait until that happens, and reassess my position then. But even so, its pretty obvious that I do still feel that Yahoo! holds more promise than the market as a whole currently thinks that it does. I certainly don't consider it on a par with many of the companies I dumped after big losses--in each of those cases I had specific reasons to feel I had made serious fundamental errors in my original choice of investment, and that I was unlikely to see decent returns within a reasonable time span (even several years).

Also, I think it would be an error not to take the extraneous factors of a major economic recession, the ad recession, and one of the biggest stock market drops since 1973-1974 into account in evaluating this particular investment. Forbes recently stated (10/29/01, p. 131) that 2001 will likely show "probably the biggest year-on-year decline [in ad spending] since 1938." Get that: 1938! How do you not take such a factor into account in your decisionmaking about whether to hold on to a company that generates the vast majority of its revenues from ads? In what sense could Yahoo!'s management have done anything to forestall that situation?

The most detailed explanation of what I am trying to get at that I have seen is John Neff's description, in his book, John Neff on Investing, of his late 1980s investment in John Reed's Citibank. (Neff is a famous value investor, the former manager of the Vanguard Windsor mutual fund.) Soon after his investment, the bottom fell out of the banking and S & L business. Nevertheless, he patiently held on through one of the worst banking disasters in modern times, even when many experts thought Citibank might actually go under. After several years he eventually wound up with a profit, but it was quite a hair-raising experience. The point of Neff's lesson, to me, is not, "Hang on and you'll invariably win," but, rather, that sometimes you have to use patience and subtlety in the investment process. Economics and share prices don't always move in a straight line from A to B.

As I mentioned, I tend to measure a particular commitment, once made, against current CD rates, as opposed to what I might feel I could make in some alternative equity investment. (Despite the fact that I've never bought a single stock because I thought I'd lose money on it, I have in fact made all too many stock selections where that was in fact the upshot of my purchase decision! Perhaps as I gain in skill and experience I'll be able to apply your methodology instead.) That said, in the three years I've been at this, the current market environment is the most difficult I've experienced in terms of offering good investment ideas. I continuously assess possible opportunities, and at present I see only two I'd be inclined to invest in--but neither thrills me enough to actually shift assets from current holdings into them. This has been the situation for many months now.

Your post succinctly raised a very good point, so I wanted to try to clarify my position.

Paul
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