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Old 02-10-2009, 10:59 AM   #21
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Running man, with all due respect I cannot follow your logic at all. It's like going into a car dealership and thinking "I want the car I buy to last a long time. I hope the dealer doesn't offer me too great a discount, or I won't have faith that it will." There's a fundamental disconnect in there somewhere.
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Old 02-10-2009, 11:15 AM   #22
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Running man, with all due respect I cannot follow your logic at all. It's like going into a car dealership and thinking "I want the car I buy to last a long time. I hope the dealer doesn't offer me too great a discount, or I won't have faith that it will." There's a fundamental disconnect in there somewhere.
My take is that it's ok to buy it around $9-10, because I believe that's what I should pay for the stock through whatever reasoning I choose. But if all the sudden the stock is $5, my reasoning must be out of whack so I why would I buy it?

Seems like if the reasoning was good at $9-10, it must be even better at $5. But then again, maybe my reasoning is off...
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Old 02-10-2009, 11:49 AM   #23
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The logic would be consistent with you went to a used car dealer and saw he offered it for sale for $10. You thought this was a good car with no engine problems, the parts of the car could easily sell for 9-11 dollars themselves.

Then a few weeks later, after thousands of experieinced professional car mechanics inspected the car, he lowered the price to $5 and none of the car mechanics wanted the car. Indeed none of the car dealers family is even willing to take the car at $5. You are not allowed to actually inspect the car, instead the only information you get is what the dealer cares to tell you. I think the odds are much greater that there is probably an engine issue that you did not realize lowering the selling value of the parts. Perhaps even after purchasing you may find the car won't even run.

By the way this is not my logic in general, but in this specific case for GE. Their big issue is their sick engine and how well it can actually run. Appropriate analogy since GE does make qute a few engines
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Old 02-10-2009, 11:53 AM   #24
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Then a few weeks later, after thousands of car mechanics inspected the car, he lowered the price to $5 and none of the car mechanics wanted the car. Indeed none of the car dealers family is even willing to take the car at $5. You are not allowed to actually inspect the car, instead the only information you get is what the dealer cares to tell you.
This is the "uncertainty discount." The stock market does that in spades. It can tolerate actual bad news a LOT more than it can tolerate uncertainty, so the irony is that in this hypothetical car, someone might pay more for a car with a big list of problems (and full disclosure) than for something where no problems are listed, but for which there is no disclosure.

The "uncertainty discount" tends to lead toward assuming the worst when assessing the potential value of an item, being a junker old car or a stock.
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Old 02-10-2009, 12:20 PM   #25
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Running man, with all due respect I cannot follow your logic at all. It's like going into a car dealership and thinking "I want the car I buy to last a long time. I hope the dealer doesn't offer me too great a discount, or I won't have faith that it will." There's a fundamental disconnect in there somewhere.
Just don't worry about it. You'll just end up pulling a brain muscle straining to think like I did.

Running man is doing his part to support our economy.
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Old 02-10-2009, 12:42 PM   #26
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I have survived and even prospered buying individual stocks for near to 40 years, and I know what he is talking about. It may not be absolutely logical, but it may map better to the world as it actually is than Spockian logic.

Stubbornness is not a pro-survival trait when you traffic in individual stocks.

Ha
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Old 02-10-2009, 12:48 PM   #27
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Then a few weeks later, after thousands of experieinced professional car mechanics inspected the car,...
Except that the "thousands of professionals" have been inspecting it continuously all during your visit, as in the blind men and the elephant parable. You know, the one where they are all examining the elephant by feel, and each one claims that it's an entirely different animal, or not like an animal at all.

Well, that's enough mixing of analogies and parables for me today.
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Old 02-10-2009, 12:50 PM   #28
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Stubbornness is not a pro-survival trait when you traffic in individual stocks.
I like that! It's now printed and posted on the cork board in front of me..... Thanks!
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Old 02-10-2009, 01:00 PM   #29
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I have survived and even prospered buying individual stocks for near to 40 years, and I know what he is talking about. It may not be absolutely logical, but it may map better to the world as it actually is than Spockian logic.
I'm going to have to take your word for it since I can't understand it.

It just seems like if you know the GE dividend is probably going to be cut, but not sure how much, you'd rather have a margin of safety in case the cut is really deep.

Now if the cut is only 50%, then you still get an attractive yield at $10, and even better yield at $5, but a yield higher than 4% either way.

But if you are wrong by a little, and the dividend is cut 75% (to $0.31 a share) then you're facing a 6% yield at $5/sh and only 3% yield at $10/sh. At $5 it looks good relative to the rest of the market, at $10 it doesn't look as good.

I have not seen this argument in this line of reasoning, but there is a real risk of non-execution if you wait for the $5 price, and it ends up that $10 is as low as it is going. If events play out in this manner, I would obviously rather pay $10 for GE and watch it go to $30 and eventually produce huge yields than sit on the sidelines waiting for $5 and watching it go to $30 lamenting the lost opportunity.

But the reasoning seems to be "buy at $10, then sell if it hits $5". I guess you only lose 1/2 your stake instead of substantially all of it?

Stick with what you know I suppose.
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Old 02-10-2009, 01:26 PM   #30
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It probably rests on hard-wired personality traits. Don't forget we are talking about a company that is a notorious black box. Analyzing GE is kind of like the fable of the blind man describing an elephant. Little can be known by outsiders.

Also, I don't believe he said buy at $10, sell if it gets to $5. Just that a price of $5 would raise alarm bells.

There are two main styles of investing once you go beyond DCA or "anytime is as good as any other time". You can buy strength, or you can buy weakness. If you engage in buying strength-"Buy high, sell higher" you know when to sell. The minute it falters usually by some selected %. From time to time followers of this method have posted on this board. I would imagine that they are doing pretty well lately.

My method has always been to buy weakness and wait. But this approach presents more complexity. It doesn't make sense that a weak stock should suddenly get strong just because you buy it, so you have to allow for continued weakness. Diferent investors have different ways of dealing with the portfolio risk of a stock that is headed for the graveyard. Some use stop-loss orders. I never have, feeling that over time you lose more due to random events than you gain by avoiding flameouts. What I do is keep the position relatively small in terms of the whole portfolio. A very transparent stock I can go larger than a more opaque situation like GE. Obviously leverage increases risk, whether it be financial leverage or business operating leverage.

I tend not to average down, unless my first postion was just a "get acquainted" one. Averaging down is logically compelling-"If I liked it at $10, I gotta love it at $5" -but when it doesn't work out you can theoretically sink your portfolio. Back in the early 80s before I had this principle fully ingrained I was happily averaging down on a particular financial stock. In those days even fairly large companies often did not have Investor Relations Departments to stand between the investor and executives. I was talking ocasionally to the CFO. One Friday I mentioned that I was really ready to go in heavy and he said- "maybe wait till mid-week". I am dumb but not deaf, so I sold at a loss what I owned and saw them declare BK on Monday.

I realize that at best I can only know a small, incomplete piece of what there is to know, let alone what has not yet happened that might affect the position. Another thing to remember is that a big loss can really mess with your head for a good long time.

Ha
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Old 02-10-2009, 05:37 PM   #31
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The logic would be consistent with you went to a used car dealer and saw he offered it for sale for $10. You thought this was a good car with no engine problems, the parts of the car could easily sell for 9-11 dollars themselves.

Then a few weeks later, after thousands of experieinced professional car mechanics inspected the car, he lowered the price to $5 and none of the car mechanics wanted the car. Indeed none of the car dealers family is even willing to take the car at $5. You are not allowed to actually inspect the car, instead the only information you get is what the dealer cares to tell you. I think the odds are much greater that there is probably an engine issue that you did not realize lowering the selling value of the parts. Perhaps even after purchasing you may find the car won't even run.

By the way this is not my logic in general, but in this specific case for GE. Their big issue is their sick engine and how well it can actually run. Appropriate analogy since GE does make qute a few engines
The Norwegian understands quite well. There used to be a term in ancient times:

'suitable for widows and orphans'

heh heh heh - stock wise that is.
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Old 02-10-2009, 08:32 PM   #32
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Warren Buffet is in at something around $22/ share. While I don't think it's a good idea to blindly follow Warren's lead. I don't think it's wise to bet against him either.
(kinda like a weekend warrior telling Lance Armstrong how to ride a bike)
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Old 02-10-2009, 09:40 PM   #33
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Warren Buffet is in at something around $22/ share. While I don't think it's a good idea to blindly follow Warren's lead. I don't think it's wise to bet against him either.
(kinda like a weekend warrior telling Lance Armstrong how to ride a bike)
No, WEB loaned them money and received warrants to buy at something like $22. He has not bought any common yet (that has been disclosed anyway).
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Old 02-10-2009, 09:48 PM   #34
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The Norwegian understands quite well. There used to be a term in ancient times:

'suitable for widows and orphans'
Yep-- a term used to describe stocks and bonds of stable companies that formed he underpinning of the US economy. Reliable giants like GE, BofA, Ford, GM.
The widow's starting to look a little worried as she sits by that mailbox these days!
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Old 02-10-2009, 10:25 PM   #35
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It just blows my mind that in the 90's people were lined up to buy dot-com stocks that had P/E ratios of a 1000 or none at all because they had "burn rates" . But there seems to be a lot hand wringing with a solid company like GE. Sure there are problems in the economy, but there has been and always will be.

What could happen to GE ? The stock goes down to zero. What then?reverse stock split? BK? (the sky is falling, the sky is falling)
These guys make stuff. Quality stuff. Stuff people need.

"Be fearful when others are greedy, be greedy when others are fearful" W. Buffet

I think it may be due to my time horizon as I'm still w*orking and not dependant on investments to live. My stress level would be much higher if I depended on my GE dividends to eat.
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Old 02-10-2009, 10:51 PM   #36
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What could happen to GE ? The stock goes down to zero. What then?reverse stock split? BK? (the sky is falling, the sky is falling)
These guys make stuff. Quality stuff. Stuff people need.

"Be fearful when others are greedy, be greedy when others are fearful" W. Buffet
You'll have to get back to us after you read through about a year's worth of Vacollector's posts on his doubling down (and tripling, and quadrupling) on Bank of America using similar "logic"...
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Old 02-10-2009, 11:00 PM   #37
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You'll have to get back to us after you read through about a year's worth of Vacollector's posts on his doubling down (and tripling, and quadrupling) on Bank of America using similar "logic"...
Here is a very interesting video from Australia. At the end they have a business owner named Harvey Norman (if you been to Australia - his stores are like Best Buys). His net worth has gone from $2.5B to $500M in 2008 because he kept "buying the dip" and averaging down.

http://www.abc.net.au/4corners/speci.../20090209/gfc/

Top left is the original report.

He puts a happy face on it by saying he is lucky because he never thought he would have $2B to loss.
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Old 02-10-2009, 11:03 PM   #38
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You'll have to get back to us after you read through about a year's worth of Vacollector's posts on his doubling down (and tripling, and quadrupling) on Bank of America using similar "logic"...
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Old 02-11-2009, 09:58 AM   #39
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No, WEB loaned them money and received warrants to buy at something like $22. He has not bought any common yet (that has been disclosed anyway).
Warren loaned GE money at 10%.

A couple weeks ago he loaned HOG $300 million at 15% interest, which they gladly paid.

Seems that the banks those companies deal with are hoarding their TARP money...........
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Old 02-12-2009, 07:58 AM   #40
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Yes, although GE's loan (well, preferred shares) is actually more expensive than 10% since they gave him the warrants for "free" and there is a termination fee if and when they decide to buy the preferreds back. So, either they are paying him 10% perpetually (which would be a really bad sign for GE which has half a trillion dollars in debt) or they buy him out after three years for the 10% premium in which case the "loan" rate was about 13%. If the latter, it will be "good" for GE since the company will be doing pretty well in which case that 13% rate will likely be higher since there's a good chance his free warrants will be in the money.
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