Was This Stock a Mistake?

If you bought any one of these stocks a year ago, you may hate yourself today:

Company

TTM Return

Garmin (Nasdaq: GRMN  )

(78%)

International Game Technology (NYSE: IGT  )

(70%)

MEMC Electronic Materials (NYSE: WFR  )

(73%)

MGM Mirage (NYSE: MGM  )

(83%)

Sirius XM (Nasdaq: SIRI  )

(91%)

Sure, they may have looked like good ideas at the time. They had great growth potential (Garmin), reasonable valuations (IGT), or a potential merger catalyst (Sirius XM). But none of these ideas has made money.

So was it a mistake to buy these stocks? Or are these still good ideas that just haven't worked out yet?

What's behind door No. 3
According to money manager Wally Weitz, it's either one or the other. And since not many stocks go up -- and keep going up -- from the day that you buy them, the key to investing successfully is to separate the mistakes from the good ideas.

Because if you have a great idea that is now 10% or even 20% cheaper than it was, you can make a lot of money by buying it again.

How now, brown cow
The way to separate good ideas from investing mistakes, for Weitz, is to track his investing thesis against the progress of the business he's invested in -- not the stock price. He says, "What we really look at is to see that our businesses are performing the way they're supposed to -- and that the business value is going up even if the stock price isn't."

To really maximize profits, he told shareholders in a recent call, "We really can't wait for the 'all-clear signal'" from the market to buy a company like Lowe's (NYSE: LOW  ) -- whose near-term fortunes will wax and wane with housing and consumer data.

But if Lowe's or Garmin or MGM really is a promising long-term business, then those near-term wanes can be the smart investor's best friend.

Buy low? No, buy lower.
Weitz isn't the only smart investor who thinks that way. Our Motley Fool Hidden Gems advisor Bill Mann confessed during a recent presentation that "I've made most of my gains on my second or third purchase of the same equity. That means the price was lower but the business quality was the same or better."

The key to doing this successfully, though, is to keep close tabs on a company's operations to know when operational reality and stock price performance diverge. If the stock drops and the business quality remains the same, then buy. If the stock remains the same and the quality of the business improves, then buy some more. But if the stock drops and the business deteriorates, you may want to hold or even sell.

That guiding principle is at work in our Hidden Gems portfolio today, where our aim is to identify the best small companies for our investors using fundamental, bottom-up business analysis. Yet we don't always get the best companies, and we're not always spot-on with our timing.

To see this month’s full review -- and our top re-recommendations in this market -- click here to join Hidden Gems free for 30 days.

This article was first published May 2, 2008. It has been updated.

Tim Hanson does not own shares of any company mentioned. Garmin is both a Motley Fool Stock Advisor and a Global Gains recommendation. When it comes to politics, the Fool's disclosure policy is pro-kitten.


Read/Post Comments (7) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 04, 2008, at 2:47 PM, DemianBohemian wrote:

    Do you guys at The Motley Fool hate yourselves for recommending XM to your paid subscribers at over $30 a share? Will you hate yourselves in the future for slamming SIRI down here at these levels all this time?

  • Report this Comment On November 04, 2008, at 3:43 PM, bobmf wrote:

    problem is this site changes their minds so often, you would get whipped trying to follow advice. They were negative siri, then positive, now negative. Sounds like a bunch of politicians where everybody is on board, then disclaim any vote they signed up for leaving the holders high and dry.

  • Report this Comment On November 05, 2008, at 4:21 PM, J56D wrote:

    Your fool community has 3762 outperforms and 918 underperforms for SIRI. It has a $.30 share price and yet you keep inventing different ways to bash this stock. The market has taken a serious beating lately and there must be great buying opportunities. Your own website claims that Sirius is no longer ratable because "SIRI doesn't currently meet the $100M market cap / $1.50 stock price minimum. It seems to me that the mangey fool seems to spend a lot of time bash a $.30 share price stock.

    Why is this?

    Do you have a hidden agenda? It sure seems that way.

    Do you lack new investment ideas? It sure seems that way.

    Are you afraid of new investment ideas being wrong like your call on XMSR to your paid subscribers at over $30 a share?)? It sure seems that way.

    Do you have to mention SIRI in every article in order to get hits? It sure seems that way?

    Is the mangey fool a joke? It sure seems that way.

  • Report this Comment On November 06, 2008, at 4:18 PM, cgsonic2008 wrote:

    Fools, where do you get your recommendations from ???

    I followed you advice on CEMEX and got wiped out,

    Abought Some Apple and now that stock lost $80 USD per share.

    Why should I follow your advice again ??? I bought 3000 shares of Sirius after reading all the negative comments for that stock from the founders of this web site.

  • Report this Comment On November 09, 2008, at 12:42 AM, avgreg wrote:

    Those are all legit questions and whether true or not deserve a response from Fool. Where are their response so I can read them?

  • Report this Comment On November 11, 2008, at 6:25 PM, SteveTheInvestor wrote:

    Were those stocks mistakes? You bet your arse they were. I don't care what you think of the company, if you buy a stock that drops 70, 80 or even 90%.... read my lips.... that was a mistake. Basically, the stock has to turn into a 4 or 5 bagger just to break even. I wouldn't hold my breath waiting for that.

  • Report this Comment On November 12, 2008, at 7:07 PM, javnnf wrote:

    Yes-- this site has become very irresponsible-- just like the Government with no fiscal responsibility.

    Most of the stocks that were recommended on HG like WTI, FLML, CBI and many others (as listed in the comments) have met the same fate, with unknown future.

    I have been burn so badly by their recommendations that from now onwards I can never trust any more recos.

    And the worst misleading source they have is CAPS which they keep quoting with pride-- as they say drunken chimpanzee could have done as well.

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