Timing Purchases; Portfolio Changes

October 23, 2008 by Joe Ponzio

I am a bull on America and the stock markets, even if we see more short-term, quotational (and real) pain in the overall markets. On October 30, 2008, GDP numbers will be released, likely confirming what we’ve all known for some time – we’re in (or technically starting) a recession.

No matter how short or long, shallow or deep the recession turns out to be, you can usually bet on one thing: The stock markets tend to rise before the economy turns around. So, forget timing the markets. Instead, let’s look at timing your purchases.

The Backwards Mentality of Riding Waves

We all know Buffett’s saying: Be fearful when others are greedy; be greedy only when others are fearful. We also know that this likely means that now is the time to get greedy, and that any continued decline means that we should all “get greedier.”

Investors, however, tend to have a natural tendency to want to ride waves. As the markets are falling, we tend to hold off on purchases, hoping to squeeze the last nickel out of our buys. When they rise, we find some satisfaction in watching our positions grow 1% or 3% in a single day.

Considering all we know about Buffett…how backwards is that? (And don’t tell me you don’t experience those feelings at least a little. Unless you have 50+ years experience and $60 billion, you know exactly what I’m talking about.)

Timing Your Purchases

When is a good time to buy stocks? All the time…so long as the price is right. But, here’s a little tip to help shake the market fears out of you: Only buy stocks when the markets are falling.

I’m not talking about buying in a “down” market like we’ve been experiencing over the past year. I’m talking about buying stocks on days like yesterday – a day when the Dow opened at 9,027.84 and never saw that level again, falling more than 700 points (7.8%) before ending the day down “just” 5.6%.

I’ve said it before and I’ll say it again – most people should not be entirely “in the markets” in general, and should opt for an intelligent strategy of bonds, or bonds and a few gigantic, “safe” companies.

Not sure if that’s you? Make it a point to pull the trigger only when the markets are falling. Then…make it a point to close your browser and walk away for three full market days. If that’s too much to handle, consider changing your strategy.

Believe me – when you can make purchases knowing that the markets are falling and that you’ll likely lose money for the day, investing will “make sense” just a little bit more.

Changes To The F Wall Street Portfolio

I mentioned that there have been changes made to the F Wall Street portfolio. As I’m at home, I can’t tell you the exact prices right now (I have them at my office); but, I can tell you that we:

  • Dumped Apple in the low-$100s.
  • Dumped half of Nutrisystem in the $19s, and the other half in the $16s.
  • Nutrisystem keeps pulling me in – I bought some back today (when the markets were down) at $10 and change.
  • Took a beating on the Landry’s workout, and sold out of the position in the low $13s earlier this month.
  • Sold out of Adobe at near break-even prices.
  • Sold out of American Eagle Outfitters in the $14s.

It seems like an awful lot of activity; but, Landry’s aside, it was all for one simple reason: As the markets began to melt down, I made a bet that some potentially “permanent” holdings would become available at very attractive, perhaps-never-again-seen prices. For that, I wanted to have cash on hand, as a Coca-Cola with a moderate margin of safety is a lot more attractive than an American Eagle with a moderate margin of safety (if it still had/has one).

(The reason for that discrepancy is predictability. You know Coca-Cola will be around, and most likely bigger, ten years from now. AEO? Though I don’t think it’s going out of business, I think we can all agree that it doesn’t offer the clarity of a Coca-Cola. The jump from “discount” to “fair value” would provide substantially the same returns; so, it’s better to opt for the easier, more predictable opportunity.)

Adding 3M to the Portfolio

So, I pulled the trigger on a new, perhaps permanent company – 3M (MMM). I won’t make the “permanent or not” decision on 3M if and until it approaches intrinsic value. Still, F Wall Street invested as though it is a permanent holding (20% of the portfolio) because it seems to offer the clarity and predictability I like in permanent holdings.

3M was added yesterday at $58.86 per share – the average of the high, low, open, and close for the day because I never discussed a price target for it before. Here’s the chart of intrinsic value versus market capitalization:

As you can see, the net price change in MMM over the last eleven years has been abysmal (even including dividends). I don’t attribute that to a bad business; I think it’s because 3M got overpriced a long time ago, and the markets had to wait for the business’ value to catch up.

So, the F Wall Street portfolio is now more invested than not, and has four positions, three of which make up the lion’s share of the value. For all intents and purposes, it is highly concentrated; but, I think our risk is a lot lower than the risks that many of these mutual fund managers are taking on General Motors and Amylin.

Portfolio performance? We’ll look at it again in June – the site’s second anniversary. Until then, we’ll focus on making intelligent decisions, regardless of the short-term price outcome.

A Note From Joe Ponzio

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