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Rational Investing in Irrational times...
Old 05-10-2005, 07:48 PM   #1
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Rational Investing in Irrational times...

I am reading this book by Larry Swedroe and he brought up a point I would like to see if anyone has any comments on this.

He wrote about "regret avoidence" leading to 2 investment mistakes. "The first mistake is that an asset should be held only if it makes sense to do so in the overall context of the portfolio's asset allocation. What you paid for the security should have no bearing (except for tax consideration) on whether you should continue to hold it. The right question to ask is: If I did not own any amount of a particular stock, would I buy any at the current price to fit into my portfolio plan? If the answer is no then you should sell it, because everyday you continue to own the security at current prices you are effectively making a decision to buy it." (page 42)


The first sentence threw me. Aren't you supposed to hold assets that are part of your portfolio plan? Should you sell all given the current high P/E's? Is this market timing? I am asking this because I am trying to get a handle on what he means.

Thank you.

LovesLife
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Re: Rational Investing in Irrational times...
Old 05-10-2005, 07:59 PM   #2
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Re: Rational Investing in Irrational times...

I think what he's trying to say is that some people buy a security, dont know why they have it still, and never think about it. If you own 200 different stocks, you probably have created your own mutual fund and its not an issue. If you're unclemick and have 10 of them, you want to think about them, have a plan. If the price on one doubles and you wouldnt think of buying at that price, maybe you dont want to be an owner. If the price on one drops in half, and all the reasons why you bought it at full price are still there, then you should want to be buying some more shares!

Unless you're a warren buffett 'buy em and hold em forever' type, you should know the fundamental reasons why you own a stock. When those reasons stop existing, so should your ownership. When the reasons magnify, you should be a buyer.

Sometimes people see half their money go away and want to sell! sell! sell! Not if the reasons why you bought the stock are still there. Some people see an investment go through the roof and think "great! I love this stock...look how much it went up" and keep it while selling those losers. Maybe at the elevated price it made more sense to sell it and buy more of your losers.

This is why some people make a lot of money in the stock market and why some people dont. The loser are people that run away when things go on sale and stock up when the price of things gets jacked up...
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Re: Rational Investing in Irrational times...
Old 05-10-2005, 11:55 PM   #3
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Re: Rational Investing in Irrational times...

Quote:
Originally Posted by LovesLife
I am reading this book by Larry Swedroe and he brought up a point I would like to see if anyone has any comments on this.

The right question to ask is: If I did not own any amount of a particular stock, would I buy any at the current price to fit into my portfolio plan?* If the answer is no then you should sell it, because everyday you continue to own the security at current prices you are effectively making a decision to buy it."
LovesLife, this is an old saw that I at least think is incorrect. Warren Buffett agrees. For a given stock , there is a buying range, a holding range, and a selling range. I have very sucessful investments that I will continue to hold, and even would hold in a tax deferred account. They are no longer clearly undervalued, but they are also not overvalued.* A good business that can be bought undervalued is a wonderful buy. Likewise, a good business that is more or less fairly valued can be a good hold, especially if it can grow its dividends. I like to add to these positions only when something comes along to knock the price down meaningfully. And I like to sell them only when they are overvalued, or occasionally when I feel totally bad vibes from the market as whole. Note to all the police on the board- I know this last point is heresy.

Mikey
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Re: Rational Investing in Irrational times...
Old 05-11-2005, 07:42 AM   #4
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Re: Rational Investing in Irrational times...

I hold a stock as long as the yield on $ PUT IN is competitive with a long bond (6-8%) range and they look like they will stay in business for a while. Usually takes 7-10 years of quasi DCA to get there.

I also am a big fan of buy high - sell low because dividend cuts are often the final coup de gras.

And - a short term trader - if it don't it make after 7 yrs - I pull the pin and dump it.

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Re: Rational Investing in Irrational times...
Old 05-11-2005, 08:47 AM   #5
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Re: Rational Investing in Irrational times...

Buy when it is cheap. Hold when it is neither cheap or expensive. Sell when it is expensive.

The main question is what defines cheap or expensive? Do you go by fundamental analysis (i.e., P/E, P/B, P/S, dividend, etc) or something else to determine overvalued or undervalued.
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Re: Rational Investing in Irrational times...
Old 05-11-2005, 06:25 PM   #6
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Re: Rational Investing in Irrational times...

th: The loser are people that run away when things go on sale and stock up when the price of things gets jacked up...


How do you make a call on oil stock (Exxon, Chevron) up,down,up,down. Big ups and downs every day. Problem is that the peaks are very high and they do come down but it still seems sensible to hold them.
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Re: Rational Investing in Irrational times...
Old 05-11-2005, 09:21 PM   #7
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Re: Rational Investing in Irrational times...

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Originally Posted by Tadpole
th: The loser are people that run away when things go on sale and stock up when the price of things gets jacked up...


How do you make a call on oil stock (Exxon, Chevron) up,down,up,down. Big ups and downs every day. Problem is that the peaks are very high and they do come down but it still seems sensible to hold them.
Oil stocks are winners now, but they can decline by a significant amount because of their volitility (or big swing). If you believe demand for oil will continue, they are definitely are stocks to hold.

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Re: Rational Investing in Irrational times...
Old 05-12-2005, 11:53 AM   #8
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Re: Rational Investing in Irrational times...

I make the call on them by buying vanguards energy fund and letting someone else do it!
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Re: Rational Investing in Irrational times...
Old 05-12-2005, 06:07 PM   #9
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Re: Rational Investing in Irrational times...

Thanks to all for the responses. Every day I learn something new here.

TH- your initial explanation was much clearer than the book.

Unclemic - "I also am a big fan of buy high - sell low because dividend cuts are often the final coup de gras." What to you mean regarding this? Is this what they say about "chasing dividend yields"?

Good explanations, Everyone. Thank you.

LovesLife

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Re: Rational Investing in Irrational times...
Old 05-12-2005, 07:11 PM   #10
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Re: Rational Investing in Irrational times...

1. Often the bad news is out about a stock and the price has fallen long before management bites the bullet and cuts the dividend.

2. "chasing dividends" - my version - buying current yield without understanding in your own mind WHY the dividend is what it is. Company specific, market reasons, unloved sector of the market, etc.

Ooop's - a little double burp there. Let's try to De Gault one - pun intended.
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Re: Rational Investing in Irrational times...
Old 05-12-2005, 07:15 PM   #11
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Re: Rational Investing in Irrational times...

You can say THAT again!

(bitten by Galt disease?)
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Re: Rational Investing in Irrational times...
Old 05-17-2005, 01:28 PM   #12
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Re: Rational Investing in Irrational times...

Quote:
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I make the call on them by buying vanguards energy fund and letting someone else do it!
Even with the recent runup, do you think it is still a long-term hold?

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Re: Rational Investing in Irrational times...
Old 05-17-2005, 01:34 PM   #13
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Re: Rational Investing in Irrational times...

I'm still holding mine. Probably will keep it forever, and maybe add to it on a dip.
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