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The assignment this month at Trade By Numbers is to write about the "best advice you've ever received."
So I took an unscientific poll and asked my buddy in capital markets at one of the Big Five Banks. "Gotta be 'Buy Low, Sell High,' " he offered.
But this classic advice, first uttered by some forthright capitalist apparently lost in antiquity, sounds good. I even employed it successfully when I bought ATI at $7 and sold it at $14, but I also have a small selection of $2 stocks that I bought low and am still waiting to sell high.
In fact, the objection occurred to me almost the moment he finished uttering the iconic incantation: Buy what low and sell what high? Or what is low, and what is high?
This concern is echoed in an article by Bill Barker at the Motley Fool, who also can't find its source. He calls it "both perfect and largely useless." You can't put it into play unless you have a 375-page manual of instruction on P/E ratios, how to interpret market cycles, etc.
And "sell high"? How many times have you bailed on a stock only to see it continue to climb for months and years to the accompaniment of your gnashing teeth? ATI soared to $21 before it started to decline a bit and I have to admit there were times when I was tempted to back it back on its ascent. By the way, it's now part of AMD, which is trading for $8.98, but a year ago, it was trading at $23. Buy low, sell high, it's so confusing.
By the way, Barker has a couple of other 4-word gems:
"Buy what you know" and "buy an index fund."
As for "Buy what you know," he cites KrispyKreme and Starbucks as examples of things you think you know, but you really don't know anything, do you? Starbucks could also illustrate Buy Low, Sell High, if you bought in back in 1987 and didn't sell until 2007, but a lot of stocks fit that description. It's called "patience," and as far as I can tell, it has helped make Warren Buffet a multi-billionaire (along with "smart").
Of course, the problem with "buy what you know" is that you have a tendency to fall in love with this stuff, and love and money are a volatile mix. I felt good about buying ATI because I knew they sold the world's best computer graphics drivers and the stock seemed ridiculously cheap therefore. I know a lot of other things, too, which is precisely why I wouldn't bet on them.
Having said that, I knew that Caterpillar supplier Finning International, Inc., was moving its operations hq from Vancouver to Edmonton to be closer to the oil sands, several years back. This struck me as a very good idea, which came after a long string of very good ideas the company had a string of more than 40 profitable quarters going. But the stock was north of $20, and because it had been there for some time, I waited…I'm still waiting. You tell me why Finning is only trading at only $29 bucks, which is not much higher than it was offered at during its long string of profitable quarters. This even though as I write, Finning has just announced revenue will grow by 7 to 9 per cent in 2008, and it's buying an oilfield services company, Collicutt Energy Services Ltd (COH.TO), an oilfield services company, in a C$145-million deal that adds capacity and skilled workers, which also seems like another smart move.
Here's a case of duelling 4-word advice (s?), if I ever saw one. If I buy low, sell high, I stay away from Finning, which doesn't seem to have any luck capturing the imagination of investors, despite what appears to be an enormous upside. If, on the other hand, I buy what I know, and that includes knowing that Finning has amassed more than one negative analyst rating. I know now is a good time to buy, in advance of the Collicutt Energy deal, because Finning will finally have enough scope to grow by double digits.
I could forget all this stock picking and follow that other four-word wisdom, "buy an index fund". A no-brainer, right? Very few individual stocks or mutual funds beat the market index. If you buy a no-load, low-cost, low-turnover and broad index fund, the entire economy would have to crash for this to turn out badly. Which, IMHO, could happen. Yesterday's 300-point dip in the Dow leads me to think if I wait a little while longer, there will be lots of bargains to feast on. Right now, no one is in a mood to buy anything. What you really need is the advice of a smart fund manager who has a great track record and can operate fearlessly in a bear market. The only problem is, who?
And that takes us full circle. Canada's number one managed equity fund is Sprott Canadian Equity fund: a great performer. Since it opened in 1997, it has had nine out of 10 years in positive territory, with increases in 7 of those years over 30 per cent. Yet, you never know when it's open or when it's closed (it's open right now. Of course, it's not having a banner year.) So it helps to know this fund and its manager Eric Sprott, to see if he has anything that's open and starting low. Turns out Sprott has a new fund the Sprott Small Cap Hedge Fund, run by Sprott's colleague Allan Jacobs. Jacobs and this fund sound a little like "buy low, sell high. The key is, he says, is if a company's earning continue to rise, the stock price will not continuously go down. He won't pay too much, though: "I don't love to pay too much for them." Well, duh.
So what to conclude? Personally, I like what I know, but only if I really know and don't just think I know it. That means due diligence; that means familiarization, and that means knowing when. Perhaps I can characterize this advice in five little words that mean a lot to an old journalist: "Who, What, When, Where, Why?"
Paul Sullivan is a longtime Vancouver journalist and president of Sullivan Media. He also writes for The Globe and Mail.