Monday Musings - 1



So I am writing this as I sit in an airport on a Saturday after a week of earnings reports and I just have to say one thing; Wow my portfolio moved all over the place this week! Now usually people post and flaunt their portfolio when it moves in the positive direction, but for me it went the other way. That being said, I am not worried because I know exactly where each position sits in terms of what I "value" them at, and that is what is important when you really get down to it.

First let's take a look at Nokia (NOK). Now NOK is a company that has been around for a long time and has had plenty of ups and downs. I originally posted about NOK early this year (you can see the post here) and I do think this company has future upside. That being said I definitely know that there are going to be some major fluctuations in this tech stock but also know what I value the stock at. So what am I thinking when it drops 20% after the last earnings report?

Well NOK has been riding high at around 6 dollars (which is way to high in my opinion) and my valuation actually has it around the $4.80 range. 

"Then why didn't you sell smart guy?" 

That's a question that definitely should be answered, so here you go...

I didn't sell because of a couple of reasons. First I originally purchased this stock at around $4.30 and so at an almost 50% gain I had a lot to like in terms of taking profit. The problem with this though is that I would get hit with tax on that profit. Second, how do I know that even with my valuation saying it is way too high that Mr. Market isn't going to keep pushing this forward? Third, if I am holding it long term (which I am) then there is no reason for me to look at this stock except for an occasional glance at the quarterly filings and the more in-depth look at the annual report. Many of you may be looking at the 20% or so that I lost after this past earnings report and be thinking that I am an idiot, but for me I am about creating passive income and those short-term drops (and gains) do not phase me. They are all part of the game.

"Then why do you even do a valuation?"

The answer to this question is simple: To Buy.

My valuation is made purely for me to take a look at what is a profitable entry point for a long-term hold on a company that I believe has a potentially strong future. This is how I am looking to create a nice passive income for myself, while also trying to build the portfolio value as high as possible with as little work as possible. Obviously "little work" is relative but what I mean is that I only have to read reports and transcripts and not follow each position I hold on a day-to-day basis. That is trading, I am investing.

Let's take another look at a position that moved my portfolio south this week, Gilead (GILD). GILD was another company that I wrote about at the beginning of the year (find it here) and is yet another company that I like long-term. GILD was recently as high as $85, dropped to just under $74 dollars after their earnings report, and at the time of me writing this article has settled back to around $77. So what gives with all this movement? Where is the right value? Do I have a bargain or a bust?

Without a valuation it is very tough to answer the questions above. What that will most likely lead to is you hitting the panic button when you see the 5-7% drops after earnings or you buying when you see the market beginning to push the price up past where you though it would go. Well I am in GILD at around $68 and I believe that the stock is actually worth over $100! That is definitely a bargain in my opinion! That is precisely why I don't panic when I see overreactions about their loss of HCV revenue, I actually invite it! This let's me pick up shares at well below my target valuation!

Now don't get me wrong, not everything is sunshine and rainbows when it comes to my portfolio. In terms of sticking to my guns it is very hard sometimes, but would be even harder if I didn't have a valuation point to keep me sane. Let me ask you this, would you hold, or even buy more, of a stock that you have lost 40% of value?

If you say no then we are definitely different investors. In terms of my purchase of Big Five Sporting Goods (BGFV) I am currently down over 35%! Am I panicking? Heck no! I actually am welcoming the opportunity to lock in a dividend that is sitting at over 8% and am comforted by the fact that I believe the market is undervaluing this stock by well under 100%. Wait did I say 100%? Yes I did! Now with earnings right around the corner I believe that I may see a turn upward soon, but what if it doesn't? Well as long as the full year projections are not drastically changed then my valuation stays the same and BGFV continues to be a bargain.

Of course this is all well and good but what if I am wrong? You know what, I could be wrong, but what would worry me even more is if I was buying and selling with total ignorance to how I value a company. There is gambling, trading, and investing. I think the first two are pretty similar. Remember that without proper research and valuation methods you are simply doing one of those.