Great question. I love the “devil’s advocate” because it challenges everyone and makes us think more.

There are basically two types of opportunities – the “there’s nothing exciting, don’t get your panties in a bunch” opportunity and the “back up the truck!” opportunity. In this post, I was referencing the former.

First: “Back up the truck!” From time to time, the markets will present an opportunity that you just have to buy – right now, as much as you can. These usually fall in the workout category, but you might find them in general holdings as well.

In these instances, it is okay to immediately invest the appropriate portion of your portfolio in these opportunities.

For the “don’t get your panties in a bunch” opportunities, I have found that it is often better to creep into a position rather than, well, get my panties in a bunch. Maybe the markets don’t like me; maybe they like to mess with me. But when I start buying, the price often drops.

For the most part, the price drops or remains relatively steady (within a few percentage points) for quite some time. As such, I’m rarely in a hurry to jump into a general, underpriced stock.

Will I miss some opportunities? Absolutely! It just happened to me – we started acquiring shares in a company slowly. I expected to get a better price as things continued to melt down in the markets, so I waited to load up more. The company accounced a major contract, the stock jumped 42%, and I had just 7% or so of the portfolio in it (I wanted 10% to 15%).

Things don’t usually work out that fast, so I missed some opportunity on that particular deal. Then again, we’ve also made extra money by cautiously creeping in and getting a slightly better price. If, as it had done for the weeks leading up to my purchase, it had dropped to the $33 or $34 range, the return would have been north of 50% on more money.

Which is better – 42% on some of the money, and more cash to find another opportunity? Or, 55% on more of the money, and less cash to find another opportunity?

In the end, I don’t think one is necessarily better than the other. Still, I’ve found that the markets allow us to creep in and, at times, get better prices regardless of what happened on this particular deal. (Example: Wal-Mart – discussed on 8/17/2007 – for the next three months or so, you could have found a better price and crept in than if you just went full-boat in. Spacing out your purchases and waiting for better prices could have been the difference between up 18% and up 30% right now.)

Make sense?

If one finds a stock that meets the price they’re willing to pay for it, why must a person purchase it in small increments over a several week period of time.

While it does make sense that the stock price could fall, giving you a lower average cost, it also makes you susceptible to the price rising. Considering the volatility of the stock market, it’s a crap shoot to assume one way or the other. If it’s a crap shoot to assume prices will go in any given direction, to me, it makes more sense to put my money in when I know it’s good.

I also don’t understand how it relieves “guru-itis” when the reason one should buy a stock in the first place is because the “guru” portion of the buy isn’t a factor; only one’s valuation of the business. I feel that if someone needs to pull out of their deal because they realized they’ve fallen trap to “guru-itis”, then is it possible not enough research/valuation was done to begin with?

P.S. I’m just learning and I’m not trying to critique your remarks. Instead, I’m trying to understand and do so by posing “devil’s advocate” like questions.

Thanks for the web site. It’s great info.

Joe, love your blog. Keep up the great writing!

I understand the basic concepts of value investing and they fit my way of thinking and personality. But here is my problem, I’m having a hard time with the math and I don’t know how to use a spread sheet. I’m trying to understand all the stuff you guys talk about, but it doesn’t come easy for me. EPS, ROE, ROIC, DEBT/EQ, BOOK, Pay out Ratio, etc. are all easy for me to understand and I use them to screen for stocks over at Yahoo! finance. But when you start talking about discounted cash flow and things like depreciation and amortization, my eyes start to glass over.

Another further problem I have is that I don’t fully believe in these mathematical operations, as they seem to me full of guesswork. So what I’ve been doing is just running screens for companies with little or no debt, high ROI, decent EPS growth and then some secondary pluses like insider ownership and dividend payout. From there, I try to pick a stock in a company that is in an industry that I think will grow significantly. These are obvious, tech, healthcare, minerals and commodities and the industries that support and supply them.

The final step, is to decide what price constitutes “cheap” or “having a proper margin of safety” and this is where you guys do all the complicated math and spreadsheet work and I just go by price history, relative PE and lots of reading to see if the “stories” ring true or not. I also depend on my natural instinct as a cheapskate, one that buys his groceries, clothes and everything else, only when they are on sale and then I “back up the truck”.

I look at my watch list and it seems in line with other value investors and further more, I would not buy even at the prices that some of them have bought:

BAC – Buffet bought in the fifties, I still haven’t bought, though I was sorely tempted at $37

PFE – Will buy under $20

AMAT- Bought at $17.83

UCTT – Bought at $10 (My river boat gambler struck)

GLW – Will buy under $20

CX – Will buy under $21

So, considering that Pabrai sold his oil company “too soon” and that Bill Miller called the bottom and jumped into home builders way too soon and that I could buy BAC cheaper than Buffet did tomorrow morning, I’m I fooling myself that I might not be giving up all that much by not being a spread sheet guru?

Thanks for the blog. I am learning tons.

With respect to kfh227, I agree. I was able to qualify for Wells Fargo PMA/brokerage acct. No maintenance fees and 100 free trades. B/c I set individual accts up for my wife and I, I get 100 trades/acct. The research is weak, but that why we have Joe!

Best wishes to all,

nn55: You can go directly to the source The Australian Office of Financial Management or you can find a broker that allows it. Many brokers will not advertise that they can purchase these bonds, but a call to the bond desk or fixed income center can confirm this.

I was curious how I would go about purchasing an Australian government bond?

Definitely a god call that at most, 1% of your cost should be commissions. I know of to many people (even some that “trade” frequently that said they buy in $1,000 or $2,000 blocks and *hope* for a 10% move). People tell me this and I immediately think, oh great. Stock moves 10%. You pay about 80% of your gain to commissions and the rest is taxed. Sometimes I wonder how the mathematically adapt people (some engineers) could make such trivial errors.

And I am one to talk because before I ever made my first investment or read a book, I first looked at commissions and realized while $20 (round trip) does look small, that is 2% of $1,000 in stock. I immediately decided before I ever invested any of my money that would buy in blocks no smaller than $5K each.

I think the attention to fees is the first thing investors should learn about/realize. It really should be chapter one of any introductory book on investing. But people writing books are a bit more savvy as investors and they probably over look these things and that some readers (probably a vast number of Mad Money readers) only invest in $500 or $1,000 blocks. I’m sure Jim Cramer points this out, or is he to busy “making investing “fun”"

I hope that was not to rantish

I don’t think anyone can complain against some mentions of your company or your book, so long as the content is still there. All of us here thrive on capitalism.