As I rush to help a friend evacuate from coastal Connecticut, I will reply in terse fashion to readers’ questions.
Q1: When to sell?
A: If I only knew the answer to that…. The standard answer is when you can replace the investment with a cheaper one (bigger discount to intrinsic value). But no one size fits all. If you buy a cigar butt, you will have to sell as fast as you can when it reaches your intrinsic value range. Time is not on your side. If you own a compounder, then be patient as value grows and the company continues to have reinvestment opportunities. Each investor has their own psychological profile. I cry during cartoons, so I need more security. I will sell on a scale up so I have fewer regrets. I give up some upside for less downside. There is no one key to selling. Also, note you have to consider taxes and reinvestment risk.
Q2: What am I reading?
Cycles and Crises by W. Ropke which provides a history and analysis of the past hundred years of boom and bust (A Jim Grant favorite). How to Make Money with Junk Bonds by Robert Levine (Rec. by Greenblatt). Very basic, but a good short primer on Junk Bonds patterned after The Little Book that Beats the Market, I don’t think intermediate or advance investors would gain as much from reading this book. Moyer’s book in the Value Vault (see below for link) is the best, IMHO.
My recommendation for students of business development, management, competitive advantage and history is:
The Great A&P and the Struggle for Small Business in America
Q3: What do I think of Investing in Dolby (DLB)?
I don’t give investment advice because it would violate the spirit of this blog which is to be independent. My opinion won’t matter; only the clarity and accuracy of your analysis and grasp of the facts. Yes, investing can be lonely and uncertain, but we must embrace our ignorance. Go through your checklist and write down your reasons for why you have an edge against the sellers. Obviously DLB has a patent cliff it is facing so what does the market price currently imply? Why are insiders selling? Is that unusual based on past history? Can you normalize this business? Excess cash is good but what will mgt. do with it? Find out what the short sellers and those who are selling have to say (Scour the Yahoo message boards). Can you refute their arguments with evidence. If you can’t, just walk away.
VALUE VAULT for Distressed Investing