It's been awhile since I've given an update on some stocks that I've been "travesting" in. I just made up travesting as a combination of trading and investing. Previously, I had mentioned how I had this crazy stock trading idea: buying because someone else paid a lot more for it.
Here's an example with what I did with Facebook. I bought 100 shares $26.83 after it had dropped from the IPO at $38. My theory was that a number of smart people paid the $38 price and paying $26.83 is smarter than paying $38. I bet Mike Piper could write a 100 page book on the problems with that. I did look at things like earnings, projected growth and all that. I also made the purchase because I've seen how addicted people are to it. When people get addicted to things, there's a lot of money to be made and smart people (like those at Facebook) will figure out how to do it.
Facebook recovered and went to $33 where I sold off 75 of my shares to lock in gains and play with the house's money. Then Facebook dropped and dropped again. My remaining 25 shares at $26.80 weren't so good when the stock got to $23, $21, $19, and lower. I ended up buying 125 more shares at $22.95 and 50 more $21.09. This gave me 200 at an average price of $22.97. I held on to those as it dropped to $19. As it recovered to $28.43, I sold 100 shares to lock in more profits. I still have 100 shares of Facebook that are well in the black now. If Facebook gets to $35, I could sell off half of those remaining 50 shares to get all the money I originally invested and keep 50 shares that would one could consider "free."
There are few different investing methods are play here:
- Trading - I realize that at times here I'm simply taking advantage of a stock being at a lower price. However, I try to invest in relatively safe companies that I don't see going anywhere. Facebook isn't going to financially collapse tomorrow. I also look to see if the price/earnings (P/E) is somewhat reasonable. This may sound funny if you look at Facebook's price/earnings on many financial websites today as it ranges between 2000 and 3000. However, it was around 70 when I started investing, and this Henry Blodget article says that it is around 50 now. I think there is an accounting reason (updated this week with its latest earnings) why the stock is technically listed at those earnings, but fundamentally the 50 number is closer to what I've seen reported.
That article also covers one of the other stocks that I won't touch due to a high P/E: Amazon. I love Amazon as much as the next person, but it will be a long time before it gets to be any kind of value. Like Blodget says in that article, "I have no idea what [Amazon investors] are thinking."
- Dollar Cost Averaging as Stocks Get Cheaper - As Facebook shares were getting cheaper, I loaded up with more. I didn't get close to buying them at their cheapest when it was $17 or so, but no one is ever going to buy at the lows and sell at the highs consistently. I had bought enough to get my average price down to $23. As the stock went back up, I was able to take some profits quicker than if I hadn't bought at the low prices.
- Buy and Hold - For all this trading, there is still a strong element of Buy and Hold. I'm not getting out of these stocks every day, week, or even month. The buying and selling of Facebook has happened over a few months and I could keep a final stake in Facebook for years.
Whatever you call it, it's working for me now. It's far from fool-proof as big companies do fail. A dozen or so years ago, I probably could have implemented the strategy with Worldcom and lost a good chunk of money never getting that rebound. I'm implementing a similar strategy on a smaller scale with Hewlett-Packard right now and it is a little risky since the company is trying to figure out its identity amongst declining printer, ink, and computer sales.
Bonus Related Thought: Apple
I've also started this strategy with Apple. If you look at an Apple chart over the past few years it looks like a classic bubble... except that Apple's earnings justified the rise in prices. Margins for Apple are shrinking, but earnings are still extremely strong and you can buy it at 35% less than it would have cost you in September. It has more cash than it seems to know what to do with and the P/E sits at around 10... a bargain for a technology company. Lastly, as I said to some friends recently, I have no problem in investing in companies that people get addicted to. Apple and Facebook definitely qualify.
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