Friday, October 28, 2005


(I will edit spelling and add links sometime later).

I am a moron. Disregard yesterday's post. Why would I doubt myself...that is investing with my heart and not my brain.

If I was thinking with my brain I would have remembered the word: volatility.

The stock market is a roller coaster full of ups and downs. The ups and downs is called risk. Beta, if you will.

Its no big deal that my stocks had dropped several percentage points in a 3 day span...(all but one of them bounced back today, and even when they were down, they have still outperformed the S&P500). When they dropped, I should have bought more, but I didn't/don't have any cash.

Here's the point: If you buy quality companies, there will be times when investors "freak out" and sell, even though the fundamentals haven't changed.

Microsoft dropped a few percent because their earnings were 1 cent per share less than analysts' expecations. Does that mean MSFT is any less great today than they were a week ago? Does that mean that they are losing market share, or that their profit margin is waning? Does that mean their management has gone to hell, or their pipeline of products looks bleak. Hardly. It means the analysts were wrong. It also means that their are exogenous factors that affect companies.

Cendant has dropped from the low 22ish to 17 something in a week. Does that mean their ridiculous cash flows are dropping, or that their strong management team isn't as strong as they were last week? Or that their market share is dropping? No they still make money, and the market still doesn't buy their stock. It just means investors are missing a bargain. If a Big Mac dropped in price to 30 cents would you buy it? In a second. Because you understand it. Investors don't understand Cendant, so they are missing this bargain. The fact remains that they continue to generate cash and cash is king.

Stericycle. They have gone up in the last few days....I bought them at 45 in March, now they're in the mid 50s. Thanks to my roomie for discovering this powerhouse.

Petsmart. Petsmart generates cash. 70% of Americans have pets. Pets in the last decade have become an extension of our families. Petsmart has high profit margins off of their services (not products). Everyone overlooks how many people have pets, and how many people think of their pet as a child. If their is a recession, are people going to stop buying pet meds, or grooming their dog? No. In fact Petsmart's sales have been high through the last few years. After Katrina hit they announced that they were concerned about their upcoming quarter because they didn't know where the economy was going. That is more than fair. Every company should be so honest. The fact is when gas was getting up to $3 a gallon (in the midwest) noone could predict what would happen. Famalies were spending several hundred dollars more than they were weeks earlier on gas. That hurts. Petsmart acknowledged that and it hurt their stock. But they are very strong...and the market will recognize that when they announce their earnings each quarter over the next 12 months.

There are my quick summaries of why I own the stocks I own. These companies haven't changed. They are still strong. I believe they are very undervalued. I can't adjust the companies to be valued correctly, just like if a Big Mac was 30 cents, I couldn't convince McDonalds to sell it for a buck something (or whatever they cost)...all I can do is discover the bargains...and buy them. And tell you when I discover them.

(DISCLAIMER: these are my views and in NO WAY the views of the Financial Services company I work for....invest at your own risk. I am merely putting my mouth where my money is.)


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