bargain hunting

Time to Get Off the Ride

We’ve all heard the basic maxim of investing: “Buy low, sell high.” And at 228Main.com, we have talked repeatedly about the perils of buying high or selling low. Just last week we asked, “Where are you on the ride?”

It is true that buying high or selling low can easily hurt you, and to avoid acting rashly, you do need to be able to recognize where you might be in a cycle.

The flip side may be true, too: you also need to be able to make timely moves when the time is ripe. Our philosophy focuses on value investing, and we are fortunate enough that you, our clients and readers, have internalized many of these notions. (So you know that we are not talking about “timing the market.”)

So the “buy low” part is relatively easy: hunting for bargains is fun and exciting! It is easy to look at a company trading at depressed prices and imagine the possibilities, even as you know that they may not necessarily come to pass.

The other part—”sell high”—is more difficult. A holding that has treated you well can be hard to get rid of. It is easy to get greedy and let it keep riding in the hopes of further returns.

But what goes up must come down. The more inflated prices get, the less sustainable they are. When prices enter an unsustainable bubble it is wise to protect your gains by selling while the selling is good.

This does not have to be an all-or-nothing process, though. You might still believe in a company’s long-term story even if prices look unrealistically high right now, in the short term. In this case it might make sense to hedge your bets by only selling part of your holdings. This lets you pocket some gains while keeping some exposure in case of future growth.

This becomes especially important when you have a high-flying investment. If certain holdings are outperforming the rest of your portfolio, they may swell up to become oversized relative to the rest of your holdings. Over time you may find yourself with too many of your eggs in one basket; periodically rebalancing away from a hot streak can help spread your risk around.

Of course, there are no guarantees. None of these strategies are magic. But letting your investments ride with a few big winners can leave them vulnerable to a big tanking at even a hint of bad news. Heck even totally decent news can spell a crash for a hot stock that’s being held up by unrealistic growth expectations.

How do we know when it’s time to get off the ride? Clients, when you have questions or concerns about your holdings, please call or email as always.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

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Some say the seeds of future gains are planted in the downturns. The future is always uncertain, but the past is not: we know many investments can be owned for less money today than last month or last year.

As we go about our work, we are seeking three kinds of bargains.

  • Great companies available at good prices.
  • Cyclical companies at low points in their cycle.
  • The best bargains in the investment universe, wherever they are.

Often, the companies we most admire seem expensive. We know farmers that are always excited to talk about buying their favorite iconic tractor maker. We hear the same thing from parents about the entertainment conglomerate that makes the movies and runs the theme parks their children enjoy. Downturns sometimes reduce stock prices to attractive levels.

Everyone knows that recessions usually hurt company revenues and profits. We are thinking how the inevitable recovery might improve revenues and profits. That long view improves our appetite for temporarily depressed cyclical companies.

Some of our favorite past bargains have come from the sector politely known as “high yield bonds.” (You and I can use a more descriptive term, junk bonds.) From time to time, at rare intervals over the past twenty years, we have found something we believed to be investable hiding in the junk pile. Times might be ripe for that again.

Now is the time. We are studying and thinking and researching to make the most of it.

Clients, if you would like to talk about this or anything else, please email us or call.