This week’s post will focus on some sample questions regarding how we buy and sell stocks.
Q: What factors do you look at when selecting individual stocks?
A: We review many different pieces of fundamental data as well as published research from a variety of sources. We then combine and analyze this data in order to draw our own conclusions. Once we add a company to our coverage universe, we monitor it daily and also review company news, earnings reports and SEC filings as needed.
Q: You bought XYZ Company and it went down. Why don’t you sell it?
A: Stock selection is not an exact science. Sometimes we review a company and the fundamentals look great, then it goes down anyway due to some piece of company-specific news or general market conditions. In a diversified portfolio, something will virtually always be down. We do not believe that a short-term adverse price movement by itself is a reason to sell if our investment conviction about a company has not changed. Although it runs contrary to human nature, many times the right thing to do in the stock market is to not do anything. We favor low turnover, since academic studies have repeatedly demonstrated that the more investors trade the worse they do. Frequent trading also drives up your transaction costs and creates short–term gains, which are taxed at higher rates.
Q: What would cause Parsec to sell a particular stock?
A: Sometimes it’s one reason, and sometimes it’s a combination of factors. Deteriorating fundamentals, loss of confidence in management, increasing debt, declining margins are several potential reasons. We also look at relative P/E, or the price earnings ratio of a particular stock relative to both the overall market and the company’s own historical range. We prefer to buy stocks near the low end of the relative P/E range and sell them near the high end. Our favorite reason to sell part or all of a position is to take profits.
Bill Hansen, CFA
January 30, 2009
We have a correction to our most recent newsletter. I had indicated the size of the upcoming fiscal stimulus program in the millions. While I wish this was true, the package being debated is $825 billion, many apologies for this over-sight.
Rick Manske, CFP