Hello and welcome to our community!

[npg]

It's what Warren Buffet and Charlie Munger mean by saying: "It's OK to pay your taxes!"

They then proceeded with an example where a 1$ investment that doubled each year was simply bought and held for a period of time (IIRC 30 years) and the full tax paid after the end of that period, and one where the 1$ was sold every year, tax taken and re-invested at the same growth.

The difference is staggering.

[WeberJazz]

There are different philosophies among members here. If you follow Phil Town's instructions, after getting out the first time, you just wait until the tools say to get in again. Then repeat the process. According to Phil, you don't stop getting back in until the price is within 80% of sticker. By then, you should be moving on to other firms don't go back to this one until it gets back down to MOS.

If you subscribe to the tools philosophy, once you get in at MOS, the ins and outs should net to positive portfolio growth, plus you have the built in layer of the original MOS. If you get out the first time the tools say stop and don't get back in until the price gets back to MOS, there is little point to the MOS in the first place.

Either get in and stay in to ride the market up to sticker or use the tools and go in and out until it's close to sticker. I choose to watch the tools, but there are others here who prefer to ignore them and ride it out. TEHO.

[npg]

Originally Posted by wishmaster

Been on this site a couple of days now. I have a ? When the MOS is reached and the tools tell you to get in you get in. When the tools tell you to get out you get out. Simple! At which point do you get back in again? I know the tools but do you have to wait for the MOS again?

There are different opinions on this. Warren Buffett would argue that you just stay invested for as long as the business itself is a great business, regardless what the market perceives it to be.

Phil Town would argue that you should protect yourself from any potential downside by following technical indicators who measure the mood of the herd.

Having tried both, my conclusion was that it is best to stay invested in a security whose purchase price has been negotiated with an appropriate margin of safety. According to my assessment these opportunities don't occur too often, so they need to be cherished and nurtured.

Once out you are effectively saying (according to Buffett) that the company is no longer good or that you have found a better deal.

<the matrix>
Do you want to take the red or the blue pill?
</the matrix>

[maxwes]

OK, here is some food for thought:


Remember, for long term buy and hold there is an AVERAGE gain. Let's say you have a great stock. Some years, the stock will gain 30%. Some 0%. Some 20%. Some 10%. Overall it is a good strategy, but therein, lies a problem with buy and hold.

OK, here is some other math.

Assume:

2 Great companies, both undervalued and with the 4 M's.

You buy Great Company A at $50/share with all the tools indicating green. The sector is hot. The number of funds owning the stock is increasing. The big boys
want in. Over the course of the year, your stock moves to $70/share. Fantastic.

But, now Mr Market is playing its games. The Big Boys are focusing elsewhere. They are not buying right now (maybe later). Maybe there is a piece of news that
temporarily causes people to sell. Maybe the earnings miss by a penny or 2. The tools are red. The sector is cold. Let's say you get out at $65/share, below its peak. Let's assume you sold at just less then a year and that your tax will be 33% (subject to variability).

Before taxes, your gain is 30%. After taxes it is 20%.

You continue to follow Great Company A, but in the meantime you put your money into Great Company B.
At this moment, undervalued and with the 4 M's. Mr Market is playing its games again. Right now the sector is hot. The number of funds owning the stock is increasing. The big boys want in. You buy into Company B at $50/share (again to keep it simple). During year 2, company B (the hot company), hits $70/share. Fantastic. Let's say the tools turn red and you get out at $65/share.
You sold before 1 year so you pay 33% in taxes.

Again, your gain before taxes is 30% and after it is 20%.

Meanwhile, Company A moves down and up and around and finishes, again, at $130/share for 0% gain over year 2.

So to sum up:

Buy and hold Company A over the 2 years ($100/share to $130/share), you've made your 15% per year. Good.

Buy and sell Company A and Company B at the appropriate time, you've made 20% per year (after taxes). Better.

After that, who knows, if you have correctly done your homework then Company A will invariably make its move again with Mr Market. You can buy in again when it does.

Now remember, this works best with stocks that follow the 4 M's and are below the MOS. If have a stock that fails to have the 4 M's and does not have the MOS - not so good.

[spectragroup]

I'm still trying to figure this one out. I agree that it is best to buy and hold for as long as the company is great. Buying and selling based on the 3 indicators will diminish your returns substantially. However, it appears that in some instances the market price may drop well below the MOS (this doesn't happen very often on a great business, but occasionally it does by as much as 20-30%!!!). That is a pretty substantial loss, especially when you don't have the experience or stomach for it. Currently my philosophy is to purchase at the MOS when the 3 indicators tell you big money is getting in and set a stop loss at a point where your stomach can handle losing money (say 5% loss). If you get stopped out, wait until the 3 indicators say get back in and do it again. If it is truly a rule #1 company the market price will eventually get well above that point and you will make it up???

[joshuat]

"at the appropriate times"

Therein lies the rub.

If I can predicate my buy/sells to occur "at the appropriate time" I can own the world in a year or two.

No one can do that.

Your analysis ignores an important piece of information. The majority of moves in the market occur over very short time frames.

Unlike the made up data in the post above, let me post real numbers:

S&P 500 1/1/82 - 12/31/2005
Average annual return 10.6%

If you missed the best days:

best 10 days: return = 8.1%
best 20 days: return = 6.2%
best 30 days: return = 4.6%
best 40 days: return = 3.1%
best 50 days: return = 1.8%

And, note these numbers to not take into account transaction costs - paying that 40% tax.

You miss just 10 days out of 6261 and your returns change 2.5%. Plus, you lose 40% of your profits to taxes. That's very hard to make up. . And the problem is, if you are trying to time the market, you are almost certainly going to miss those superlative days, because superlative days usually come out of troughs. You have to be in the market during down periods to get the returns. Markets mostly slumber, and then dart quickly in one direction or the other. The bulk of the gains usually come in only 6, 9, or 12 days. No one can predict what days those are.

I am not making this up, or theorizing. It has been exhaustively studied, with the numbers run on many different scenerios. Read Malkiel, please. He's the father of this stuff. He invented many of the concepts that Phil wrote about in his book. And he has researched this issue as well. The data is incontravertable.

For maxwes' analysis to be valuable, he needs to price in all the times you make mistakes. You sell A, but it shoots up 20% in a week, and you bought B and it drops 10%. Etc. Because that is what really happens in trades; they all don't go your way. When that is factored in, and again, the studies have been done, buy&hold always comes out ahead.

It certainly can make sense to sell a stock that is fairly priced or overpriced to buy another stock trading at MOS or lower. Buffett did a lot of selling when he was younger and didn't have sufficient cash to buy a great company. But the reality of 40% taxes means you have to be really, really, really, really sure you are making the correct bet, because the taxes are vicious. If you are buying cigar butts, you have to resign yourself to a lot of sales - it's part of the model. I've bought some recently, and fully expect to sell before a year is up. But if you are buying great companies, which both Buffett and Town are advocating, selling it in under a year is a very questionable activity, even if currently overvalued.

Malkiel, Buffett, Munger, Ruane, Greenweld, Schloss, Fisher, Graham, basically everyone who consistantly beat the market over a number of decades, use this approach.

I probably sound harsh, and I apologize maxwes, but I'm really bothered when investment advise is given that contradicts well known investment research. People can and will lose a lot of money trying to trade.

ETA: if you are in a tax free account, the numbers do change in your favor, but you are still up against trying to predict which 10 days in a 6261 day period are the best. If you can't do that, you will not beat the market, and you might as well be buying index etfs.

[capp53]

Very good point Joshuat. What is missing from your analysis is the amount saved by not being in on the ten worst days. All of these calcualtions are very difficult to predict. What is missing from the discussion is the emotional factor. Trading the technicals at least eliminates fear and greed as reasons for buying or selling.

[maxwes]

I disagree. The bulk of the gains, when it comes to Rule 1 stocks, occurs over months. Take, for example, UNT. A company that many have talked about extensively on this board. A stock that had a nice long run, up until June of 2006. It was down until March of 2007. It is now bullish again. During that period from June 2006 through March 2007, you could have invested elsewhere where the technicals were in favor.

You have have to set your tools correctly in order to avoid buying in and out too quickly. I use weekly settings for example. I look at the 30 and 50 and 200 day MA. You have to have a company that we all agree would be a Buffett, Graham, and, yes, Phil Town type of company.

[maxwes]

Also, regarding your comment on studies and research. Ask yourself these questions:

Which stocks were studied? (were they the types of stocks that we look for on this board)

When it comes to technicals, what technicals were studied? What settings?

You can compare the stock to itself. In other words, you can compare how the stock does long term buy and hold vs. using the technicals. Which will bring you out ahead? That is easy to determine. But you cannot factor into this study what your money is doing while you wait for the technicals to turn back around.

There are too many variables to rely on the research alone.

[joshuat]

" Which stocks were studied? (were they the types of stocks that we look for on this board)"

That's an execellent point, maxwes, and one I'm mulling. The studies are across all stocks. The question is, do our stocks exhibit the same behavior? I'd hazard a guess and say no so long as you are talking about when they are severly undervalued, but yes when they are fairly valued. Unfortunately the buy/sell/hold decision happens somewhere around the fairly valued point.

I have a love/hate relationship with academia vis-a-vis investing. I don't buy into the efficient market hypothesis for a second. OTOH, research about stock prices is pretty much unarguable.

Here's a non-hypothetical for you, though I don't expect an answer, as I'm hardly in a position to assign other people homework :) Nontheless, here is a real issue I face, as I own the positions I'm going to describe.

I own MCF. MCF is up, well, a satisfying amount. My lizard brain is screaming "SELL" - take the profits. I also own SHLD. The recent prices have been downtrending lately.

I believe in both companies. I don't believe the market has priced in the proven and probable reserves that MCF owns, nor do I think that have priced in Mr. Peak's capital allocation prowess. Long term, I like this company.

SHLD I think is sitting on a lot of valuable assets. Prices are down due to some disappointing numbers, and I also think people expected Lampert to act more quickly to invest the cash surplus. I think there is a lot of upside to this stock long term.

So, lizard brain says sell MCF, and buy into SHLD while prices are low. However, I fully plan to hold MCF, and acquire SHLD as I can. Why?

Well, what are the prices of MCF and SHLD in 6 months? People blithely toss around comments about buying when stocks are going up, selling when they are stagnant.

So, my very simple question, where are the prices of MCF and SHLD going, that I should take a guaranteed 40% loss of profits?

(n.b. I have other buying options than just SHLD, but I just choose that one as I currently own it. Toss in any stock you like for the buy part of the
equation).

I can't tell you where the prices are going. I don't know which stock is going to be hot. I know that after each price spike MCF slowly dropped, but certainly not enough to justify taking a 40% hit. If I thought MCF was overvalued I'd certainly sell right now, but I don't think that. So, I hold.

Stock prices are not serially correlated. MCF could release an update today on their dutch holdings that could cause a 30% spike up or down, depending what the news is. I just don't know, and neither do you unless you work for one of their drillers. Making a bet by selling MCF now, assuming they are going to go sideways for awhile, and paying 40% for the priveledge is just gambling, not investing.

Anyone who disagrees, I welcome to give me the stock prices in 6 months hence.