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  1. #1
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    Default FPH ............ TA and FA meet?

    A significant number of competent ST posters have suggested that FPH might be fully valued - or even overvalued. The shareprice keeps going up though, so are they all wrong? I don't think so.

    The market carries a lot of momentum. Rising stocks almost always overshoot their "true value", just as falling stocks almost always fall below their "intrinsic worth". The trouble is everyone has their own view as to exactly where these levels lie. Even if there was some way to precisely calculate the exact worth of a stock, there is no way of knowing just how far the market will overshoot in any particular instance. To sell simply because a stock had reached your theoretical value caps your profits at that point and you miss out on any "overshoot" which can be quite substantial. It seems to me that the answer here is to use FA to determine when a stock is approaching its "value" then switching to TA to time your exit - with a view to selling when the uptrend shows signs of weakness. Many people think that TA and FA can not and should not be mixed and you must choose one or the other, so such an approach will offend purists on both sides.

    Looking at the chart we can see that FPH was in a steady long-term uptrend (dark green trendline) but since December the uptrend has accelerated and FPH is now in a steep uptrend. Too steep to be sustained. There are technical indications of potential weakness such as RSI divergences. There is a new confirmed trendline in place (light green) with price action clearly above it. I would suggest that a break of this trendline would provide an appropriate exit signal. Very conservative looooooong-term holders might prefer to wait until the long-term (dark green) trendline is broken but this would mean giving perhaps 50 cents or more of profit back to the market. Any exit system is better than none though!
    For those that do not like trendlines, there are other tools such as Trailing Stops that can be used. Long-term, I had been using a 16% trailing stop with FPH but it became evident that this was a bit too conservative so I tightened it to 13% as soon as it became obvious that the uptrend has accelerated. When I found myself in agreement with others here that FPH was looking a bit overvalued, I tightened the stop yet again to 10%. I do not anticipate tightening it any more than that.



  2. #2
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    Phaedrus, I am genuinely surprised that you are letting fundamental considerations influence your choice of trailing stop margin.
    Given that 13% seems to based on back testing recent data, I would have thought you would have kept to that.

    regards

    Paper Tiger
    om mani peme hum

  3. #3
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    From the FA point of view, I calculate fair value to be around $4.00. You certainly aren't getting a bargain with this one.

    If I already owned this I would not sell unless either:
    a) The market was pricing it far beyond its' intrinsic value or
    b) The fundamentals looked like they may deteriorate significantly over the next few years.


  4. #4
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    There. See how quick and easy it is to simultaneously offend both sides!

    Mr Market, You say that "If I already owned this I would not sell unless....the market was pricing it far beyond its' intrinsic value..." This sounds as though you have an exit strategy, when in fact you haven't. Without defining just how far "far" is, you are free to sell or hold at whim. Your sell trigger is not pre-determined. What you have is an idea - not a system. You probably put quite a bit of effort into estimating your $4.00 "fair value" for FPH, why not utilise this and resolve to sell when the market exceeds this by a certain percentage? Even if you make it a target range, you will have set minimum and maximum exit points. Without defined exit criteria, you are simply holding and hoping. If you had bought FPH, I would guess it would have been on the basis that it was undervalued (x% lower than your $4.00 estimate). To me, it seems only logical to then sell when it is y% higher than your best estimate.

    Paper Tiger, Any decent system will pull you out of a stock long before a trailing stop is hit. To my mind, trailing stops are best used as a secondary backup to the primary system. They can provide an exit strategy for people that do not have a system - as such they are a lot better than nothing. You can see from the chart that the trendline will probably be broken long before any stoploss is hit. I speak a lot about "tightening your stops" and FPH provided a nice practical example of how this can be done. I let fundamental considerations influence my Buy decisions, so it seems only logical to let fundamental considerations influence my Sell decisions as well.
    There is another factor here that I have not mentioned at all. As you are aware, I monitor the Index (NZSX50) very closely, using it to guide my overall market strategy. Right now, I am a gnat's eyelash away from moving into "Caution" mode, where all sell signals must be acted on, buying is frowned upon, and all stops are tightened. I'm just being a good boy and keeping to my system. I'm in anticipatory partial caution mode.

    PT, I thought you were a TA sceptic. Have you changed or did I read you wrongly?

  5. #5
    Reincarnated Panthera Snow Leopard's Avatar
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    I am a sceptic of many things.
    TA is something that interests me and I have set out to understand it. But I currently make little use of it for making buy and sell decisions.
    om mani peme hum

  6. #6
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    EEERRRKKKK! I just bought some FPH warrants at $2.50. Couldn't you have posted this a few days earlier Phaedrus??

    I consider it to be a good stock and bought because I have usually missed out in the past thinking stocks such as RYM were overvalued - only to see them consistantly rise further.

    But one thing I've learned from this forum is that stocks over-shoot and thus I'll sell if need be.

    Thanks again Phaedrus for your thoughtful analysis.

  7. #7
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    quote:Originally posted by Phaedrus
    Mr Market, You say that "If I already owned this I would not sell unless....the market was pricing it far beyond its' intrinsic value..." This sounds as though you have an exit strategy, when in fact you haven't. Without defining just how far "far" is, you are free to sell or hold at whim. Your sell trigger is not pre-determined. What you have is an idea - not a system. You probably put quite a bit of effort into estimating your $4.00 "fair value" for FPH, why not utilise this and resolve to sell when the market exceeds this by a certain percentage? Even if you make it a target range, you will have set minimum and maximum exit points. Without defined exit criteria, you are simply holding and hoping. If you had bought FPH, I would guess it would have been on the basis that it was undervalued (x% lower than your $4.00 estimate). To me, it seems only logical to then sell when it is y% higher than your best estimate.
    Hello Phaedrus, I don't think our paths have crossed much before on this board even though we've both been around a while.

    I imagine that you, as a technical analyst and judging from your line of questioning, would have liked me to have provided a more precise response to your assertion that FPH is fully valued. Unfortunately, fundamental analysis is not a precise science.

    You have assumed that 'quite a bit of effort' went into determining my estimate of fair value at $4.00. In fact it took me no more than 30 seconds to arrive at that number. All that one requires is the current earnings per share and a suitable discount rate. It is easy to remember the multipliers for various discount rates. Now, as reported earnings per share can deviate from the true value, and the discount rate is estimated, my valuation is necessarily an estimate.

    You are correct in assuming that I would only have purchased FPH if it were undervalued. And it is true that I would set the price at some percentage of my estimated value. This is my margin of safety.

    Now as far as an exit strategy goes, that is an interesting question, and one that I find TA's have the most difficulty in understanding from the value investors point of view. Simply stated - the value investor seeks to buy at a price at which he will never need to sell. This of course requires choosing the right stock as well as the right price. In fact most of my effort goes into trying to understand the long term prospects various types of business. Now in the real world even the best businesses sometimes dissapoint. If the predicted earnings don't come through then the instrinsic value goes down. This outcome is precisely the reason for purchasing at a discount. So, in the unlikely event that the price falls below my purchase price, I would consider selling.

    As for selling on the upside, as I said I would prefer to hold the stock forever. The only time I would consider selling an excellent stock is if I percieved the market to be pricing it at an irrationally high price, since such irrational pricing is often followed by market crashes.

    Finally, I do have a system, but is a system based upon the evaluation of probabilities, rather than the calculation of certainties.

  8. #8
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    Mr Market, I have to admit to agreeing 100% with your investment philosophy. I have held FPH (or F&P as it used to be) since 1991 and never sold any and indeed topped up my holding on occasion. I would have to lose confidence in either the management or the healthcare products market in general to be inclined to sell them.

    Since my going-in cost is effectively 36c per share after splits I figure I can ride the downswings.

  9. #9
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    Interesting comments Mr. Market. And how, pray, do you determine the discount rate for any stock?

    Thanks Phaedrus, for reaffirming that most successful systems are simple. Value benchmarking should indeed be a more profitable stop loss.

  10. #10
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    quote:Originally posted by beacon

    Interesting comments Mr. Market. And how, pray, do you determine the discount rate for any stock?
    Discount Rate = Risk-free rate. i.e long term average rate on a long-term government bond. Of course this will vary over time, so is necessarily an estimate. All the more reason for purchasing at a discount (you build in a margin of safety).

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