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I have learned to take II stock valuations with a grain of salt because many current positions are well above fair value. My instincts suggest otherwise - if we sit 25% above fair value and the potential upside is a big negative, then what are we doing holding the stock? Yet there are plenty of examples, Tim Horton's comes to mind, where fair value was just a road sign on the way to big profits. Is there a reason for this and is it a good thing, a bad thing or a non-event?
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Many, if not most II members place income and capital preservation
above growth. The II value is quite conservative, but keep in mind
that if they are still listed as active picks they are a "Hold"
not a sell.

That means if you have them, keep them but if you have new funds
to put to work there are other picks that are under valued that
would be a safer play.

In early 2011 I had a good size chunk of money to put to work,
I really wanted to own WM but it was close to 40 and very close to it's
stated II valuation so I waited, then in August of 2011 WM dropped
and I got it for a little over 30. Now it's back over 40.

It can be frustrating for new members to see a big list of stock
recommendations and 60% of them are a "Hold", but keep in mind
that in most cases it's a good thing because it means a stock was
added as a new "Buy" and then the price went up over it's valuation
and then was put on "Hold".

There are still many "Buy First" and "Buy" stocks to chose from
and the II Team is always re-evaluating their picks,
if the price drops or the fundamentals improve then a "Hold"
will be changed to a "Buy", and of course new monthly picks
are always started as a "Buy".

In May 2013 the II Team picked AAPL as the new monthly pick
it was about $450 but AAPL started paying a dividend in mid 2012
it was around $650 and it was climbing fast, it was hot and
everyone loved it! A lot if dividend investors are sitting
here now wondering if they will ever get their 650 back
but if you bought at 450 I think you will have good dividend
payer for years to come without having that big capital loss.
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Ozzzy,
Thanks for your perspective, especially the part about conservatism. I am not concerned about wanting to buy stocks that are on hold, I am most concerned that fair value is so far from current value as to suggest that our thinking is stale - i.e. either sell or revise the value upward. A big negative margin of safety flies in the face of most sound investing theories. OTOH, if we label the valuation as a floor conservative value and forget the concept of potential appreciation - call it market relationship to conservative value - well those names suck, but you get my drift, right? TMF certainly does not want me to think that I am staring at 25% negative appreciation, do they?
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TMF certainly does not want me to think that I am staring at 25% negative appreciation, do they?

This discussion brakes down when put in a frame of reference of TMF as a whole. Discussing fair value in reference to buy points on II means one thing while the same discussion on Rule Breakers is totally different.

Yet RB has fabulous returns as does II. So it's a comfort thing concerning investing style, not a right or wrong investing method.

Regards,

Bob

who doesn't expect to see many RB stocks on II
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Fool4ZTribe,

There was some commentary on this in the recent update. It started by noting that each holding would be reviewed, both for value and status with the coming issue.

http://newsletters.fool.com/1048/coverage/updates/2013/07/16...

I have learned to take II stock valuations with a grain of salt because many current positions are well above fair value.

I agree that valuations are simply a guide, but would note different reasons. Valuations represent more a perspective than a measure, so it is very reasonable that they vary quite a bit among those considering them. Here in II, consistency of income and potential for capital appreciation are considered, but for some investors one or the other could be primary. Right now, it seems the market is considering income potential with more weight than potential for capital gains/losses. If your goal is primarily steady income, you may well be content to be semi-indifferent to quotational value (hard in practice, but often reasonable).

Ralph
Helical Investor
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Fool4ZTribe,

valuation as a floor conservative value and forget the concept of potential appreciation

The title of this service is Income Investor. The companies on Hold are labeled as such because it is believed they are not good targets for new money to be invested to provide Income at a reasonable price.

Price appreciation is a secondary factor opposed to services such as SA, MDP, RB, Options, etc. II is not a good source to find multi-baggers.

Income Investor is about providing a cash stream. Example: My dividends and interest are sufficient to pay more than 100% of my annual expenses. Only 1 of my dividend payers has reduced it's dividend. Including that reduction, my 12 month dividend increase is 7.87% based upon my current share count. The average increase is 18.24%.

The appreciation of price is very much appreciated, but the plain matter of fact is many of these companies have a tendency to be cyclical. Over long periods of time, they grow but over a shorter term like 5 years they go up and down. Look at the Sell rec for PFE(isn't hind-sight great!) If it had been held, it would have returned about 16% annual. Buying it new at the sell would have a better return.

Don't look at Income Investor picks in the same light as the other services.

Look at them as a Dairy Herd. You want milk to drink, make butter and cheese with and to use to buy other things. If you slaughter the herd, no more milk. However, good herd management dictates that you need a supply of new heifers to replace aging cows that drop in production.

So, Buy the Buys, Hold the Holds and Sell the Sells.

Gene
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Hi Gene,

Look at them as a Dairy Herd. You want milk to drink, make butter and cheese with and to use to buy other things. If you slaughter the herd, no more milk. However, good herd management dictates that you need a supply of new heifers to replace aging cows that drop in production.

I love the analogy! Although as an aging cow myself, I do get nervous ;-)

Regards,

Bob
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Great analogy, Gene!

I've never heard it put quite that way....well done!

Cheers!
Murph
Home Fool
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RTB,

Although as an aging cow myself, I do get nervous ;-)

Bob, you surprised me here. I always thought of you as the Bull of the herd! ;-)

Gene (Oops! I guess that could be taken 2 ways ... Don't take it the wrong way, fella!)
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