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.