Dear Mr. Ballmer,
As I was subjected to an advertisement for the Zune for the 23948239842348532904932745th time, the thought occurred to me that you may not be fully aware of the state of your company.
You are beating a dead horse (maybe more like a stillborn colt) with the Zune, and you are beating dead horses in every business you compete in.
You are fighting fierce battles, on several fronts, against savvy opponents. Apple in consumer devices. Oracle and SAP in business software. The open source movement in development software. Google and the freeware movement in desktop software. Google, TimeWarner, eBay, Yahoo, and News Corp. in internet properties. Sony and Nintendo in gaming platforms.
You are either losing, or your lead is precarious, in all of these battles. More importantly, you have already lost the battle in the hearts and minds of your potential customers, who see you as either pure evil, or even worse, just plain uncool.
As I see it, your company has two choices.
You can admit that your company is in a long, slow, irreversible decline, and that your stock is in reality a bank treasury, and you can use your cash war chest of $25 billion to fund a buyback and a significant dividend, in order to reward your shareholders.
Or, somehow, someway, for the first time in your company's history, Microsoft could start innovating.
And cease the beating of dead horses.
Thursday, June 28, 2007
Tuesday, June 26, 2007
Lessons Learned from the Sell Side
I'm going to be completely lazy and start off this post by quoting myself.
"Is there anything harder in stock investing than deciding when to sell? Either you have a winner, and would like to be 'prudent' and take some profits, even though you risk giving up on even greater profits. Or you're stuck with a loser, and 'prudence' calls for cutting your losses, though that entails buying high and selling low, a surefire way not to make money.
And, sure, they are just pieces of paper, but you love these stocks. You don't want to abandon them when they've been so good to you, or are going through some hard times."
Sounds like there's some lessons to be learned...
I've already written about the good and bad of the stocks I've sold, which has led to these proposed principles for selling a stock:
1) Know your decision points, and stick to them. Note that the decision can be hold or buy more, and not just sell.
The decision point I use is when the stock falls one-third from its high, during the time I owned it. I decided on one-third because I don't want to fret over my stocks if they have a few bad days - I want to give them ample room to operate in what is now, and will be for the foreseeable future, a volatile market.
Furthermore, I decided on letting all my stocks fall one-third before I decide what to do with them, because just like the bottoms, I can't call the tops either. I'd rather let the market carve out a top for me, and risk losing some money, than attempt to call out a top, be wrong, and miss out on even greater gains.
Both of these strategies have the added advantage of reducing the burning of cash on commissions, which although they have dropped greatly over the years, are still significant at the levels I trade at. If you are trading larger dollar amounts, you can probably tighten up the percentage, and/or make incremental trades.
One important exception to these rules: a stock that goes sideways for an extended period of time. There's nothing more irritating about investing than when a stock is bought, and it just does nothing. I say the decision point is one year of sideways trading, then revisit it.
2) Re-examine the buy-side story all over again. Once a decision point is reached, use a fresh buy-side analysis to determine whether to sell, hold, or buy more. Are the fundamentals still intact? Has the bear or bull case strengthened or weakened? Has management changed its outlook? Have existing competitors stepped up their efforts, or new competitors broken down the barriers of entry?
I like to frame the decision like this: if I didn't own the stock already, would I want to start buying it at current levels? If the answer is "yes", then that's good reason to at least hold, or consider buying some more. If the answer is "not sure" or "no", that's good reason to sell.
3) Try not to panic. Many of my bad sells occurred when the stock had fallen near its decision point, some bad news had pushed the stock down below the decision point, and I shot first and asked questions later. When it turns out the bad news was short-term or inconsequential, the market was actually doing me a favor and giving me a great buying opportunity - yet I did the exact opposite and sold.
Given that panicking is sort of an involuntary response, this is a tough rule to stick by, but I still think its a worthy aspiration.
4) Don't fire and forget. I keep an eye on all of the stocks I sell (obviously), trying to evaluate whether the decisions I made were right or not, and hopefully apply those lessons to the next decision point. Also, it's fun, in a strange sort of way, to watch a stock I sold plummet. Petty fun, but fun nonetheless.
I think the bottom line here is that success in investing is all about planning and execution. And, hopefully, the past can influence the future for the better.
"Is there anything harder in stock investing than deciding when to sell? Either you have a winner, and would like to be 'prudent' and take some profits, even though you risk giving up on even greater profits. Or you're stuck with a loser, and 'prudence' calls for cutting your losses, though that entails buying high and selling low, a surefire way not to make money.
And, sure, they are just pieces of paper, but you love these stocks. You don't want to abandon them when they've been so good to you, or are going through some hard times."
Sounds like there's some lessons to be learned...
I've already written about the good and bad of the stocks I've sold, which has led to these proposed principles for selling a stock:
1) Know your decision points, and stick to them. Note that the decision can be hold or buy more, and not just sell.
The decision point I use is when the stock falls one-third from its high, during the time I owned it. I decided on one-third because I don't want to fret over my stocks if they have a few bad days - I want to give them ample room to operate in what is now, and will be for the foreseeable future, a volatile market.
Furthermore, I decided on letting all my stocks fall one-third before I decide what to do with them, because just like the bottoms, I can't call the tops either. I'd rather let the market carve out a top for me, and risk losing some money, than attempt to call out a top, be wrong, and miss out on even greater gains.
Both of these strategies have the added advantage of reducing the burning of cash on commissions, which although they have dropped greatly over the years, are still significant at the levels I trade at. If you are trading larger dollar amounts, you can probably tighten up the percentage, and/or make incremental trades.
One important exception to these rules: a stock that goes sideways for an extended period of time. There's nothing more irritating about investing than when a stock is bought, and it just does nothing. I say the decision point is one year of sideways trading, then revisit it.
2) Re-examine the buy-side story all over again. Once a decision point is reached, use a fresh buy-side analysis to determine whether to sell, hold, or buy more. Are the fundamentals still intact? Has the bear or bull case strengthened or weakened? Has management changed its outlook? Have existing competitors stepped up their efforts, or new competitors broken down the barriers of entry?
I like to frame the decision like this: if I didn't own the stock already, would I want to start buying it at current levels? If the answer is "yes", then that's good reason to at least hold, or consider buying some more. If the answer is "not sure" or "no", that's good reason to sell.
3) Try not to panic. Many of my bad sells occurred when the stock had fallen near its decision point, some bad news had pushed the stock down below the decision point, and I shot first and asked questions later. When it turns out the bad news was short-term or inconsequential, the market was actually doing me a favor and giving me a great buying opportunity - yet I did the exact opposite and sold.
Given that panicking is sort of an involuntary response, this is a tough rule to stick by, but I still think its a worthy aspiration.
4) Don't fire and forget. I keep an eye on all of the stocks I sell (obviously), trying to evaluate whether the decisions I made were right or not, and hopefully apply those lessons to the next decision point. Also, it's fun, in a strange sort of way, to watch a stock I sold plummet. Petty fun, but fun nonetheless.
I think the bottom line here is that success in investing is all about planning and execution. And, hopefully, the past can influence the future for the better.
Monday, June 25, 2007
Lessons Learned from the Buy Side
Last week I looked back at both the good and bad of my stock buys. Now it's time to try to formulate some simple rules to be applied from my past experiences.
These rules, like any of sort of rules, are made to be broken. They will always be a work-in-progress.
I guess what I'm saying is, these aren't really rules at all. Maybe just guidelines, or philosophies, or hypotheses.
Whatever. Let's get started.
1) Fundamentals matter. Everything starts with the fundamentals (duh). These are easy enough to find on the web using Yahoo Finance's "Key Statistics" pages. The ones I really pay attention to (followed by what I'm looking for) are:
Market Cap (min)
Forward P/E (min)
PEG Ratio (min)
Profit Margin (max)
Operating Margin (max)
Return On Assets (max)
Return On Equity (max, and greater than Return On Assets)
Total Cash (max)
Total Debt (min)
Levered Free Cash Flow (max)
% Held By Insiders (max)
% Short of Float (max)
Forward Annual Dividend Yield (max)
These values should be compared vs. competitors and vs. the market in general.
Now, you can't find a stock that has all of these things, but you can find stocks that have most of these things, in your favor. Sometimes it's good to own stocks that are average across the board, but exceptional in one category (such as a large dividend yield). In any case, you'll certainly want to think twice about buying stocks that are unfavorable in any more than a few of these categories.
2) Don't fight the market. Or, "Don't try to call the bottom." If you have your eye on a stock that is well off of its high, be aware that it could very well be further off from its high in the future - especially if its fundamentals aren't the best.
Please note I am not saying "don't buy distressed stocks". Fallen stocks often represent the best opportunities the market has to offer. I can see two ways around this: either let the market carve out the bottom for you before you decide to buy (i.e. the chart has a nice "bounce" established already); or just buy the stock, and be prepared to DCA your position, or bail out altogether, if the stock falls further.
3) Understand, and disprove, the bear case. Bears aren't stupid; they can't be because, by definition, they make up roughly half the market at any given time. But just because they aren't stupid doesn't mean that they aren't wrong at any given time. When you find that the reasons keeping a stock down in the short-term aren't likely to hold up in the long-term, you have a catalyst for that stock to outperform the market.
4) Find a compelling bull case. Beyond the fundamentals, I want my stocks to tell a great story, such as "Google is going to be the first trillion dollar market cap company", or "Baidu is the next Google", or "Under Armour is the next Nike". It's up to you to find the evidence for which such bold proclamations are going to become true, and when you do find that evidence, it becomes a lot easier to own the stock through thick and thin. (For the record, I do own GOOG, BIDU, and UA.)
Tomorrow I'll look at the sell side.
These rules, like any of sort of rules, are made to be broken. They will always be a work-in-progress.
I guess what I'm saying is, these aren't really rules at all. Maybe just guidelines, or philosophies, or hypotheses.
Whatever. Let's get started.
1) Fundamentals matter. Everything starts with the fundamentals (duh). These are easy enough to find on the web using Yahoo Finance's "Key Statistics" pages. The ones I really pay attention to (followed by what I'm looking for) are:
Market Cap (min)
Forward P/E (min)
PEG Ratio (min)
Profit Margin (max)
Operating Margin (max)
Return On Assets (max)
Return On Equity (max, and greater than Return On Assets)
Total Cash (max)
Total Debt (min)
Levered Free Cash Flow (max)
% Held By Insiders (max)
% Short of Float (max)
Forward Annual Dividend Yield (max)
These values should be compared vs. competitors and vs. the market in general.
Now, you can't find a stock that has all of these things, but you can find stocks that have most of these things, in your favor. Sometimes it's good to own stocks that are average across the board, but exceptional in one category (such as a large dividend yield). In any case, you'll certainly want to think twice about buying stocks that are unfavorable in any more than a few of these categories.
2) Don't fight the market. Or, "Don't try to call the bottom." If you have your eye on a stock that is well off of its high, be aware that it could very well be further off from its high in the future - especially if its fundamentals aren't the best.
Please note I am not saying "don't buy distressed stocks". Fallen stocks often represent the best opportunities the market has to offer. I can see two ways around this: either let the market carve out the bottom for you before you decide to buy (i.e. the chart has a nice "bounce" established already); or just buy the stock, and be prepared to DCA your position, or bail out altogether, if the stock falls further.
3) Understand, and disprove, the bear case. Bears aren't stupid; they can't be because, by definition, they make up roughly half the market at any given time. But just because they aren't stupid doesn't mean that they aren't wrong at any given time. When you find that the reasons keeping a stock down in the short-term aren't likely to hold up in the long-term, you have a catalyst for that stock to outperform the market.
4) Find a compelling bull case. Beyond the fundamentals, I want my stocks to tell a great story, such as "Google is going to be the first trillion dollar market cap company", or "Baidu is the next Google", or "Under Armour is the next Nike". It's up to you to find the evidence for which such bold proclamations are going to become true, and when you do find that evidence, it becomes a lot easier to own the stock through thick and thin. (For the record, I do own GOOG, BIDU, and UA.)
Tomorrow I'll look at the sell side.
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