Post of the Day
January 28, 1999
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Subject: Lessons Learned
I joined the "Ranks of the Stock Investors" back in March of '97... After dutifully reading the wisdom put forth by the brothers Gardner, I evaluated my investment strategy (or lack thereof) and took the plunge on a number of stocks - using a rather amateurish melding of Lynchism and Foolism and diversification. By way of full disclosure (and because I'm somewhat proud of how my choices have done), I'll state for the record that I came up with Cisco Systems, The Gap, McDonalds, Starbuck's and Disney.
Of all the stocks I own, Disney has taken me on the wildest ride - and in the process taught me the most about the market. Here are some of the lessons I've learned:
Stock Splits Are Not a Guaranteed Winner. In this amazing bull market, more often than not, a split seems to presage some kind of fore and aft stock price run-up. It's easy to look at Dell, Microsoft and AOL and lose sight of the fundamental reality facing most stocks and their prices.
While many Fools counsel against using a stock split as a buy indicator the fact remains that stock splits often cause "irrational exuberance." For those of you around for the 3-for-1 stock split in July, you'll no doubt remember all the big talk about the stock running up to $140 by the end of the year. (That's about $48 post-split for those of you keeping score at home). Well, I certainly heard that talk and began smacking my lips in anticipation. Lo and behold, this stock saw $120+ pre-split - then "The Troubles" began... earnings warnings, concerns about ABC, increased competition at the box office and home video, etc. Now it's one of the laggards of the Dow...
|"DIS started plummeting in the midst of a stock-split feeding frenzy. This frenzy was spurred in large part by random and apparently wildly inaccurate upgrades from 'The Wise.'"|
The Big Boys are Full of Nonsense The previous lesson learned (re: stock splits) certainly isn't intended to denigrate the stock or the company, merely to point out the fact DIS started plummeting in the midst of a stock-split feeding frenzy. This frenzy was spurred in large part by random and apparently wildly inaccurate upgrades from "The Wise." The lesson learned here is one oft-stated on this site, but never truly learned until confronted with such a stark example.
I believe it was First Swisse Bank that send forth the word that it was upgrading DIS, on the eve of the stock split and in the midst of a massive run-up, with a target price of 135 or 140 or some such nonsense. They noted strong theme park sales as part of their reasoning. Whatever. They were wrong, as they often are, and they merely served the purpose of pouring gasoline on the fire. Take their upgrades, downgrades and neutrals with a huge grain of rock-salt... Weigh their various opinions against your own research, don't rely on folks with massive ulterior motives to drive your investing.
Bigger Isn't Always Better and Know the Company. Once again, the preceding lesson leads directly to the next... To wit, part of my rationale for buying DIS (as with my other purchases) was that it was safe because it was a global company. My thinking was that profits and positive earnings were a sure thing. Because DIS is so large, the company had the ability to "make up" for its problems in one division with higher profits in another. Naive? yes. Sound research? No.
The point of this lesson is that if a company is diversified, one must look at each of one of that companies various divisions when evaluating the current health and future growth potential of a given company. In other words, one should really know the company they are investing in to feel at ease and confident with their decisions. This may seem an obvious point, but it's easy to forget and even easier to overlook as a novice investor.
|"...if a company is diversified, one must look at each of one of that companies various divisions when evaluating the current health and future growth potential of a given company."|
Patience. Let's be honest folks - It's not tough being patient with a Cisco, or a Gap or a McDonalds for that matter (all up between 50 and 120 percent from when I bought them). Starbuck's, at one point sank below my entry level, but only for a day or two.
Now, Disney has really taught me to evaluate my decisions. I got in at 106 (35+ post split). At times that looked like a bargain, at times it looked like a colossal blunder. The fact of the matter is that I can't predict the future - and neither can the Wise. I have confidence that long-term this is a sound, growth investment. If I am eventually proven wrong, I can now say I have truly evaluated all of Disney's ventures and have a full picture of where they are headed and what the pitfalls are ahead.
In the end, the DIS experience has resulted on one real tangible result: I now follow between 7 to 8 companies - have been doing so for about 6 months - in the event that I free up cash to invest in the future. I have read the news release, familiarized myself with their business cycles and in general have followed them as I would follow one of my own...
It may not be the most time or cost efficient way to have learned, but I'll forever remember Disney as the company/stock that provided me the first useful lessons in the long journey of investing.
For whatever that was worth,
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