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Book Lynch appears to come down on the side of checking the story for changes and then checking the price for the risk/reward relationship. That's how I read him over the years.

To be honest, I think you've answered your own question. Watch your holdings - if you're confident of what they're worth 5 years out based on the current story, don't worry about the price in the near-term. The severity of any drop may drive you to re-check the story more often or in more depth, but shouldn't necessarily drive a sale (unless other circumstances make it useful, like a better opportunity with greater probability of gain.) The point is check the story first. If it hasn't changed, the price drop is at worst an additional wait.

On the other hand, if the stock reaches your target valuation (or gets pretty close to it well ahead of schedule), you have the option to lock in the gain. Howardroark's post is right on topic there. (thanks for re-introducing it btw - I'd forgotten about it and am beginning to catalog posts that I want to revisit periodically)

The problem you're presented with in that scenario is wondering if you made a mistake and underestimated the value. From what I hear (and have on one occasion experienced - I'm not particularly active) selling at a 30% annualized gain only to see the stock taunt you with 200% is not pleasant. I would think you'd have to watch for that bias when re-evaluating your story. But if it hasn't changed dramatically and doesn't appear to be your most attractive option anymore, take the gain (or some of it) and don't worry about the rest.

I'm of the opinion that the next year will offer some substantial gut-check opportunities, for reasons that others have elaborated here and elsewhere better than I could. I say that not to be believed, but because it can be a good idea to sort of prepare yourself for distressing news. I find re-reading letters from authors whose opinion I respect to be enormously helpful as a sort of mental and emotional backstop.

Frankly, despite my gloomy near-term outlook, there are a quite number of companies that look approachable from a perspective of 5+ years out. I'm not buying because I'm not convinced that they won't get more approachable in the not too distant future, but that's me. (I feel sort of like Mel Gibson in Braveheart as he and the Scots are staring at the English descending upon them, waiting until the last minute to gain maximum advantage. Except for the whole face painting and kilt-raising thing.) Also, even if the market has hit bottom and begins to rise, I don't sense that every stock will immediately run up, up and away and leave us in a sort of Dow 36,000 investing hell. But my point is that even if the market does drop, it offers reasonable long-term returns for investors who know what they're doing even if you have to wait through it. So I guess my answer is: keep one eye loosely on the stock price but concentrate on changes in the story first. Don't do anything unless a) the story has changed, b) you have reason to suspect your model is flawed or c) you have an opportunity that is significantly quantifiably better regardless of the story (including tax implications, etc;) Some help huh? Good luck,

Chris
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