Author Topic: And now for something completely different  (Read 4496 times)

JackRiver

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And now for something completely different
« on: March 26, 2009, 02:39:37 PM »
Okay, maybe not. 

Question:  I am presently thinking about buying a particular stock at a current price of 50 and decide not to buy, but five minutes after I make this decision news breaks that's very negative with regards to the company and the stock plummets to 30.  I decide to buy at 30, and five minutes later news breaks that the breaking news before was completely false and the stock shoots back up to 50.  What should I do, buy, hold, or sell? 

Yours

Jack River


oldye

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Re: And now for something completely different
« Reply #1 on: March 26, 2009, 02:54:22 PM »
At every price point there is your expected after tax rate of return, because you bought i'm assuming you know what the rate of return is at 30,40,50 etc.  If at 50 the expected after tax rate of return is lower than the opportunity cost you gotta get out.

short answer is reread Ben Graham


« Last Edit: March 26, 2009, 03:02:26 PM by oldye »

JackRiver

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Re: And now for something completely different
« Reply #2 on: March 26, 2009, 03:26:30 PM »
Okay, and I follow you and let's say that the threshold was not met and that is why I decided not to buy at 50 originally, now what do I do, do I sell?  Forget about taxes, it's in an IRA.

Yours

Jack River

ericopoly

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Re: And now for something completely different
« Reply #3 on: March 26, 2009, 03:30:52 PM »

ericd1

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Re: And now for something completely different
« Reply #4 on: March 26, 2009, 03:31:35 PM »
If you thought $50 was a buy, then $30 is a far better buy.

If you thought $30 was a far better buy, did you invest more at $30 than you planned to at $50?

Assuming you bought the same dollar amount, or more at $30, and it's now at $50 I'd sell the extra shares purchased at the lower price and continue to hold the initial dollar amount as planned. I'd re-invest the short-term windfall in my next winner (btw, no consideration given to tax implications.

JackRiver

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Re: And now for something completely different
« Reply #5 on: March 26, 2009, 03:46:32 PM »
If you thought $50 was a buy, then $30 is a far better buy.

If you thought $30 was a far better buy, did you invest more at $30 than you planned to at $50?

Assuming you bought the same dollar amount, or more at $30, and it's now at $50 I'd sell the extra shares purchased at the lower price and continue to hold the initial dollar amount as planned. I'd re-invest the short-term windfall in my next winner (btw, no consideration given to tax implications.

Ericd1

I said that I didn't buy originally at the 50.  So I guess that means I didn't think it was a buy at 50.  Does that change your reply to me?  If it does or it doesn't, what should I do?  Please if any others can help me with this as well. 

Ericopoly, nobody should say I don't at least have a little bit of humor in me.

Yours

Jack River

Santayana

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Re: And now for something completely different
« Reply #6 on: March 26, 2009, 04:29:09 PM »
Continue to hold and buy puts.

oldye

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Re: And now for something completely different
« Reply #7 on: March 26, 2009, 05:20:38 PM »
Say you think the company is capable of increasing its value by 10$ a share/year.  At 50$ you have a 20% ERR, at 30$ you get a 33% ERR, only reason you'd want to sell at 50 is if you could do better than 20% somewhere else. 

ericd1

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Re: And now for something completely different
« Reply #8 on: March 26, 2009, 05:25:18 PM »
Ok gotcha Jack, you were considering the purchase but didn't pull the trigger at $50...But you now own it with a $20 profit.

If you didn't like it before at $50, take the $ and run. If you want to second guess your initial decision then pull your initial $ out and let the rest have a free ride!

How about this one -- I liked GE at $18, liked it better at $10 and bought the leaps at $6. Now I'm up 67% on the leaps and down 44% on the stock. What do I do now?

ericopoly

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Re: And now for something completely different
« Reply #9 on: March 29, 2009, 11:19:02 PM »
Jack,
What did you learn from these replies? 

I find that it would depend on why you didn't buy at 50.  You never specified.

A few possibilities I will list off hand:
1) You might have been sucking your thumb at $50 as Buffett did with Walmart (don't sell it at $50)
2) It might not be as good a value upon return back to $50 as the other stocks you traded for cash to buy at $30 (sell at $50 and trade back)
3) You might have studied it very well and simply don't find it to be a good value at 50 (sell at $50)
etc...


Any answer of mine is dependent on why you didn't buy. 

Buffett was simply waiting for a better price with Walmart before buying a bigger chunk, but he still thought it was a buy (he says so).

You wrote:

I said that I didn't buy originally at the 50.  So I guess that means I didn't think it was a buy at 50.

Don't guess, be specific if you can.  Otherwise (if we're guessing) I would say, that the fact that you didn't buy at 50 doesn't necessarily mean that it wasn't a buy at 50.  It could be that you should have been buying at 50, but weren't doing so because you were anchored on getting some better price (a few percent lower), like Buffett did with Walmart for example.