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Ask The Readers: Is this Trading or Investing?

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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.

Posted on February 1, 2013.

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10 Responses to “Ask The Readers: Is this Trading or Investing?”

  1. Tommy Z says:

    I wouldn’t touch Facebook stock with a 10 foot pole.

    First, I think it’s way overvalued. Even if you assume of P/E of 50 – it’s way overpriced.

    Second, I’m not convinced that Facebook is staying power. Just look at MySpace – it basically was the main social networking website up to around 2006 or so and now it’s nothing. With younger users, Instagram is already more popular than Facebook! Older users are going more towards Linked-in. From just watching the status updates from my friends, I can honestly say that people are using Facebook much less frequently than before.

    Third, Facebook’s main revenue stream are the advertisements you click on the side of the page. With more and more of their users connecting via phone instead of computer, that revenue stream is quickly evaporating. Just look at Zynga – their stock is down to just $2.66/share.

    Regarding Apple, I think it’s a solid company. I’m waiting until it hits $400 and then I’m going to buy it with my Roth IRA money for the long-term.

  2. Cassi says:

    I personally wouldn’t buy facebook stock either, because if you look at how myspace died, the young adults left and then everyone else followed.

    Now, if it is working for you, I’d say go for it! I’m just informing you that I think facebook peaked a few years ago and it is now going down.

  3. Lazy Man says:

    MySpace didn’t have the friend connections that Facebook has. It’s hard for people to leave Facebook because their friends are on there. Friendster would be a better analogy, but I don’t know anyone who spent any kind of time on Friendster communicating with others.

  4. Tommy Z says:

    MySpace did allow you to connect to friends and you could chat with them using MySpace as well. It was incredibly similar to Facebook and yet it failed.

  5. Lazy Man says:

    I don’t think the interaction was nearly the same. People didn’t spend nearly the same amount of time on Myspace. I doubt it had anywhere close to 1 billion on it. As an example, I didn’t know a single person with a MySpace page and now I can count only about 3 people I know who aren’t on Facebook.

  6. I’m not a huge fan of facebook. Google plus will be the dominate social network in a few years. The valuation for the stock is very high at the moment.

  7. Matt G says:

    I remember one of your previous posts about doing this with Groupon. It seems like you’re picking more volatile tech stocks with this strategy – which is what you want for this, really.

    This is definitely trading – the main idea here is to try and buy low/sell high (of course). However, it doesn’t seem that your buy/sell is dependent on anything but a gut-check of the stock price. I’m not saying it won’t work, but I feel like this is a strategy that’s going to even out to 0 in the long run.

    Keep us abreast of how it goes, though!

  8. Lazy Man says:

    The Groupon move was interesting. I bought in too early at $7.42 and dollar cost averaged down to buying at $2.63. I sold 85% of my position at $4.80, which as left me with 100 shares that I paid about $16 total for (or $66 if I count commissions as I should). So if Groupon goes to 0, I’ll take a small loss. However, I’ll continue to hold 100 shares at $5+ number it is at.

    In the case of Groupon, I thought that the fears in Europe which had hit the stock hard were overblown. I was betting that Europe would rebound and Groupon would rebound with it. Maybe I got lucky or maybe it was good, but it wasn’t a complete gut purchase.

    Just so it doesn’t sound like I’m cherry picking good ones, I also bought some Zynga. This definitely goes against what I said about solid, big companies, ones that aren’t likely to fail. However, Zynga has a solid amount of cash that can support the stock even if you don’t value the company at much. I’m up about 5% on that… not really enough worth discussing one way or the other.

    I’m up about 8% on Hewlett-Packard (reason for investing was a miniscule P/E of something like 4; if they are able to remove their head from their butt for 30 seconds, it should be a good gain).

    I’m down about 9% in Apple, having bought in at $541, $486, and $449. I’m probably the least worried about that one.

    Oh and the reason why I typically go with technology is because it is what I know. I can’t tell you much about aluminum prices or anything like that.

  9. Matt G says:

    Thanks for the additional insight; tech is what I know best as well, so I understand that.

    Glad to see that you’re putting that much thought into the P/E, cash reserves, etc. I just didn’t think that the background work that you put into the trades showed through as much in the article. There’s definitely value to knowing if/when a stock is over/undervalued and your strategy will work much better and if you’re able to decipher that.

    I agree with you on Apple; I was surprised to see the stock fall so far, but the rivalry with Samsung is heated and everyone was losing their heads when AAPL didn’t introduce some ultra-revolutionary upgrade with the 5. I’d be buying in at $450 as well if I had the scratch. Best of luck with it-

  10. Kosmo says:

    There are two basic aspects to a stock’s price:

    1) The actual performance of the company and its expected future performance.

    2) Investor excitement

    Back in my finance class in college, we learned a simple formula for the “correct” price of a stock. It was simply the net present value of all future dividends (from now until the end of the world, or until the company ceased to exist, whichever came first).

    However, we don’t have a perfectly efficient market. Some investors don’t have perfect information, and many choose to ignore information and go with their gut.

    Your goal is to correctly guess the future direction of the stock – and it’s prudent to keep both causes of fluctation in mind. A stock that has great financials can still get beaten down for other reason.

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