I like being a retail investor, because I have something on my side that gives me a huge advantage over mutual funds, endowments, and other institutional investors: time.
I don't have to report to anyone at the end of every quarter, with people demanding to know what my three-month returns are and why I lost money on "XYZ" while making only a tiny amount on "ABC" (all while ignoring that I killed it on stock "DEF").
If I'm familiar with the company and have a sound investing thesis, I can let time correct many mistakes -- like why I didn't buy at the bottom.
Case in point
I'm the analyst who follows Netflix (NASDAQ: NFLX ) for the Fool's flagship service Stock Advisor. I know the company, its advantages, and its threats, and I have argued that it is a winner several times and have personally held shares for many years.
But I made a mistake while investing in the company.
Beginning in the summer of 2010, I started writing puts on Netflix -- options with strike prices far enough below the share price that I fully expected them to always expire worthless, thus I wouldn't have to buy the shares. (Writing a put means I must buy shares at the strike price if the share price is below that when the option expires.) I ended up doing this several times in a row and made some pretty good income, being paid for each put. It was successful until the day it wasn't.
The last put I wrote had a strike price of $230 in June 2011 (shares peaked at about $304 that summer). I did that just in time to "enjoy" the collapse of the stock price thanks to the Qwikster fiasco. In September 2011, I had to buy shares that were trading around $130 -- for $230 each.
I held onto those shares and at one point was sitting on a loss of about 75%. However, I didn't have to answer to irate investors in a mutual fund or to any board of directors at an endowment fund. In addition to a bit of luck, I had knowledge of the company, I saw that CEO Reed Hastings had rapidly about-faced on Qwikster, and subscriber counts had started climbing again. Given all that, I held. (I also bought shares, twice, for the "MUE" real-money portfolio I run for The Motley Fool.)
Today, the shares are again above $300, and the returns for this position are over 30% (about 17% annualized), even including the time spent underwater. Time has been my buddy.
More "timing" the market
Netflix is hardly the only example -- just my most dramatic one.
For instance, I bought shares of Meritage Homes (NYSE: MTH ) , a medium-sized homebuilder, about a year before the housing bubble started to collapse. I followed the company and learned to respect how CEO Steve Hilton ran his company, moving rapidly from growth to preservation to coming out of the collapse. When the housing bubble collapse hit, it moved quickly from growth to survival, switching to paying off and refinancing its debt. Once it had shored up its balance sheet, it then started preparing for when the housing market would turn around, buying lots very cheaply. It also began to increase the desirability of its homes, marketing them by comparing them (favorably) to rentals and increasing the energy efficiency of its homes. Today, it sells exceptionally energy-efficient homes, which is a big selling point today.
After losing as much as 80% from that initial small purchase, my total position is now up 57% (I bought several times during the downturn).
And then there's Apple. I've purchased shares for the MUE port five different times at prices ranging from $329 to $526. Overall, the position is in the green by about 11%, but when the share price fell to $390 last April, I didn't have to explain to various angry people why I was still holding the shares. It's a big advantage when I can let time and my understanding of the company dictate my (in)action. I actually think the company is going to do pretty well going forward, and I expect higher prices again.
You win some, you lose some
I'm not saying it always works out. I've held onto shares of companies that I should have sold (like Acusphere). And I've sold shares of companies I should have held on to (like Cheesecake Factory).
Here's an example of the former: I finally sold shares of Dendreon (NASDAQ: DNDN ) from the MUE port, possibly eight to 12 months later than I should have. The warning signs were there, in hindsight (including slowing sales and a worsening balance sheet -- it has $385 million in net debt today, up from $230 million just nine months ago and $30 million at the end of 2011), but I wanted to give the company some time to turn things around. When I finally decided that it couldn't before it likely ran out of cash (explained here), I let the shares go and had to eat an unpleasant loss.
On the whole, however, having time is a big advantage. It lets you as an investor get to really know a company and its management. That tends to make you more comfortable with holding through a downturn, or even buying additional shares. And all of that can turn what would otherwise be losing positions into long-term winners.
And, finally, you can only achieve Peter Lynch's 10-baggers if you are patient and let time work for you.
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