One idea I have touched on here in the past is being a sucker for a good story. They all sound great. Realizing I am a sucker I rarely buy a story stock for clients or personally.The chart is for a company with a fantastic story; Foxhollow Technologies. They make drills (extreme simplification) that route out arteries.
The drills appear to work, the demographics are very compelling and when I last studied the company it seemed as though they were ahead of their competition.
I bought it quite a while back and it went up a little, then it dropped, I sold it and it dropped some more. The story is no less compelling but I am missing something and I don't know what it is.
This post is not about Foxhollow, I am not a buyer and I am not saying you should be a buyer. The post about the fact there are a lot of great stories out there and you will not get all of them correct. A story stock may or may not be a long term hold but you need to be cognizant of when a stock is a story stock and have some sort of trigger point for selling the ones you do get wrong.
Owning a lot of individual stocks like this, even if they are doing well, makes the job of portfolio management more difficult and possibly the portfolio more volatile.
This is not to say you should not do this but understand the drawbacks of this approach and to be clear every approach to investing will have some drawbacks.
7 comments:
I recently read Ken Fisher's new book "The Only Three Questions That Count." He makes the point that you make $ by understanding something others don't - when market comes to a more accurate understanding, securities are repriced and so if you can figure it out in advance you can front-run the price change. Point is that price changes are not a function of good news or bad news, but rather changes in perceptions/expecations of the news, so e.g. if everyone expects Microsoft to beat earnings by 2 cents, when they do it's a non-event price wise since already priced in.
All of that is a long winded way of saying that a good story stock is a dangerous thing. If story is public and widely known, it's probably already priced in. If the story is really good, there's probably a lot more downside potential than upside. If everything plays out roughly as you and everyone else expect, best you can hope for is stock price moves sideways. The only way to make profit is if the story gets even better. It's sort of a tactical take on market efficiency.
For me personally it's why I prefer to hunt among the train wrecks.
Michael--I have Fisher's book, and though I find his ubiquity annoying (who is on more pop up ads?), I found it very interesting. Helps one think freshly about things.
generally the market prices in things, all known information as Ken puts it but there have been plenty of times where the market has not perfectly priced everything.
The point here is not being a fan of the words always and never.
A good lesson to all, Roger. Incidentally, this problem exists among institutional bond managers as well. A bond will trade at a yield high than what you'd expect based, on rating, maturity and other obvious features. You ask your representative why the bond trades cheap, and he tells the story. They are often called "story bonds" as a result.
Now a bad manager buys the bond without discussing it among colleagues (or other friends). A good manager thanks the rep, and hands the idea off to his analyst, who can opine on the issues involved. The manager and analyst can then decide whether the extra spread is worth the extra risk.
It is always worth it to look into stories, bonds and stocks, but it never pays to be too credulous in the markets. Caveat emptor.
David Merkel
http://alephblog.com
Indeed, having endured several stories like Foxhollow caused me to shy away from individual stocks and prefer ETFs.
As an individual investor working full-time I find that stocks are just too rich for my blood and that I can't afford the time to do the proper research.
I find ETFs a more reasonable way to deal with trends and themes which I can afford the time to do, and even though I may miss the high flying stocks in the trends/themes I don't wake up in the morning to find that my issue declined 15% due to a bad quarter.
And to all who say we have too many ETFs I say - bring them on, they will allow finer tuned targeting of themes and will always be less risky than individual issues.
Thanks,
SA.
Speaking of stock picking prowess, check out this story about Charles Allmon, editor of the Growth Stock Outlook newsletter.
http://tinyurl.com/3yotpa
This guy is always heavily in cash but has a fantastic risk adjusted performance record over the past 26 years.
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