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Hi Everybody,

Here's some of my take on Chapter 8 - The Investor & Market Fluctuations.

I think that this chapter is so key to successful investment thinking that I'm going to take some greater time with a few of the chapters concepts.

"Longer term bonds may have relatively wide price swings during their lifetimes and a common stock portfolio is almost certain to fluctuate in value over any period of several years. The investor should know about these possibilities and should be prepared for them both financially & psychologically.

Since common stocks, even of investment grade, are subject to recurrent and wide fluctuations in their prices, the intelligent investor should be interested in the possibilities of profiting from the pendulum swings.

There are two possible ways by which he may try to do this: the way of timing and the way of pricing. By timing we mean the endeavor to anticipate the action of the stock market - to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward. By pricing we mean the endeavor to buy stocks when they are quoted below their fair value and to sell when they rise above such value.

A LESS AMBITOUS FORM OF PRICING IS THE SIMPLE EFFORT TO MAKE SURE YOU DO NOT PAY TOO MUCH FOR YOUR STOCKS.

II is convinced that the intelligent investor can derive satisfactory results from pricing of either type. They are equally sure that if he places his emphasis on timing, in the sense of forecasting, he will end up as a speculator and with a speculators results. "

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Mr. Buffett has often said that the concepts behind successful investing are not as hard to master as the discipline needed. I think that this portion of Chapter 8 demonstrates this idea perfectly.

I think that if one could have only a single piece of advice to base their investment program on, "Make sure you do not pay too much for your stocks" would serve the investor very well. The key point being that like other avenues of consumerism, it is imperative to calculate what you are paying relative to what you are getting. The tricky part is being able to stick to the resolve not to overpay when one is bombarded with "expert" and associate tips and assurances for gain.

On a personal level, a most difficult temptation to ignore is when a situation that was deemed slightly too expensive moves significantly up in price. This situation where the common thought is that money not made can be equated to money lost can easily lead to a (probably) unwise loosening of prudent investment pricing. For me, this is where the discipline is needed to realize that money not made is not equivalent to money lost and to realize that in the long run a greater benefit will be received by holding firm to the valuation methodology.

Helpful to remember is Mr. Buffett's qoute,

"This is the cornerstone of our investment philosophy. Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results."

ZB
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I think that if one could have only a single piece of advice to base their investment program on, "Make sure you do not pay too much for your stocks" would serve the investor very well. The key point being that like other avenues of consumerism, it is imperative to calculate what you are paying relative to what you are getting. The tricky part is being able to stick to the resolve not to overpay when one is bombarded with "expert" and associate tips and assurances for gain.

On a personal level, a most difficult temptation to ignore is when a situation that was deemed slightly too expensive moves significantly up in price. This situation where the common thought is that money not made can be equated to money lost can easily lead to a (probably) unwise loosening of prudent investment pricing. For me, this is where the discipline is needed to realize that money not made is not equivalent to money lost and to realize that in the long run a greater benefit will be received by holding firm to the valuation methodology.


Well said, Zenvestor! After six years of investing in individual stocks, mostly large-cap non-techs, this is the part I think I'm finally starting to get the hang of. I like to combine fundamental research into intrinsic value with Buffett's margin of safety, and a wee bit of TA to find a good entry point. It used to be really agonizing to put in a limit buy order on a stock, only to see it go on a run without ever getting a fill (like happened with me recently on MSFT, where I missed getting a fill by 1/4 of a point at 40/share! Arrrggggg!). Still, as time goes by, I find it easier to resist the psychological pressure of seeing a stock get away from me, especially after watching what happened last year! ;-)

Now, maybe you could share with us some advice on how to optimize our approach to the sell side. I'm unloading 5-6 of my dogs, mostly stocks I've held for 3-5 years which, in various ways, have violated the premises I bought them for. In doing so, I am trying to apply Graham and Dodd in reverse, in other words set sell limits which, based on a mix of fundamentals and technicals, will diminish the likelihood of selling out too cheaply in the short run. Its not a positive margin of safety, because they might never get there, and I don't want to wait that long.

Just as an aside, when I saw the results of tax selling starting last October, depressing stock prices indiscriminately, I just suspended all plans to sell my out-of-favor stocks, figuring that a likely rebound in January, and the delay of any tax consequences by a year, would make the risk worthwhile. I confess to having a pathological aversion, as an investor, to doing anything which is aligned with what the majority of investors happen to be doing at the time. Based on the few trading days of 2001, I think this approach may turn out o.k., but it's too early, and, even if it works, it may be just luck. None of my stocks has yet hit its sell price, but one (MU) is getting close, and at a much better price than I would have gotten at anytime during the last quarter.

What are your thoughts on applying Graham and Dodd principles to the sell-side?

With high regards for your writing...

John J.
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"In doing so, I am trying to apply Graham and Dodd in reverse, in other words set sell limits which, based on a mix of fundamentals and technicals, will diminish the likelihood of selling out too cheaply in the short run. Its not a positive margin of safety, because they might never get there, and I don't want to wait that long."

Hi John J.,

It sounds like your selling methodology is very reasonable, but it does seem that the question of when to sell is a much more difficult one to come to grips with than the when to buy question.

My take on Ben Graham's view is that he seems to imply that in an enterprising situation, where one has bought at a significant discount to fair value, it would be reasonable to recognize the profit at fair value and look for other enterprising opportunities. On a more defensive situation, where one has bought a solid, stable or growing company at a good price, he seems to indicate that there is no need to sell unless the companies longer term fundamentals reduce fair value below the current market or if the general market seems to have driven prices to unsustainable highs.

It is tricky, however, to pin down Graham's exact selling criteria. Unlike some other investment authors, he doesn't make it easy by having a chapter called "When to Sell".

A couple of other books that do have "When to Sell" chapters and that I've found helpful and that seem to also align with Graham's view somewhat are Peter Lynch's "One Up on Wall Street" and Philip Fisher's "Common Stocks and Uncommon Profits". These two books seem to expand on Graham's hints at selling. I especially think that Lynch's view on selling comes in handy.

For me personally, it seems that while investing is both art and science. Buying an investment is maybe 60% science, 40% art and selling seems to be more like 20% science and 80% art. Hopefully, if I buy the right companies at the right prices, I can mangle the sale a bit and still come out OK overall.

An example for me was my holding in DTG, I initially purchased some at around $19, estimating a fair value in the high $20's. Being a little more enthused at the companies good performance at the time than I should have, a more conservative analysis brought down my estimated value to the low to mid $20's. Without significant conviction in a valuation that gave a decent margin of safety or a conviction that company growth could be significantly sustained, I was quite willing to sell at a neglible gain, loss or breakeven and look for a better situation. Could the stock price go to $25? Probably. Could the stock price go to $30? Possibly. But I feel quite happy, given my initial overvaluation and decent but not good buy price, to get out of that position and pass up any speculative (in my view) profits that may occur.

ZB


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<<...will diminsh the likelihood of selling out too cheaply in the short run.>>

The only way you can be sure you're not selling stock too cheaply is if you confine your stock sales to when the companies get taken over.

jkm929
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