Boring Portfolio

Trading Can Be Investing
Thursday, May 07, 1998
by Mark Weaver (MWEAV@aol.com)


Springfield, IL (May 7, 1998) -- The market continued its retreat today in spite of big merger news and relatively upbeat economic news. On the day, the S&P dropped 0.88% while the Nasdaq fell a more substantial 1.16%. The Borefolio backed off a more modest 0.24%, which allowed the folio to continue its recent trend of market outperformance.

The big winner for the Borefolio was Pentair (NYSE: PNR), up $1 11/16. Pentair has been in the news twice this week. First, it formalized its bid for VERO Group plc, besting the offer that was on the table from Allied Power (NYSE: APW). Pentair has offered 102.2 million pounds for the company, which works out to approximately two times sales. The goal of the bid is to strengthen Pentair's position in the arena of electrical enclosures. Pretty boring stuff.

Yesterday Pentair announced the acquisition of privately held T-Tech ATF Exchanger Products. What is an ATF Exchanger you ask? It is a device that exchanges automatic transmission fluid. This acquisition makes Pentair the leader in the ATF Exchanger market. Joe Collins, president of Pentair's Professional Tools and Equipment Group said, "The T-Tech acquisition furthers our strategy of growing through bolt-on acquisitions that offer our existing businesses a means of extending their product offering or entering new distribution channels." This all sounds good to me, and if an ATF Exchanger isn't boring... well, what is?

Carlisle Companies (NYSE: CSL) was also in the news this week. Yesterday the company declared a $0.14 per share dividend payable June 1. The company also added a couple of new board members. Carlisle was unchanged today.

Over in the Boring Stocks message folder the conversation has been more lively than usual. There has been a thread of discussion on whether the Boring approach is a "trading" or "investing" approach. Much of the discussion has focused on the sell side of the equation. Do investors sell? Or does the willingness to sell stock imply a trader's mentality?

This all got me to thinking... (probably a dangerous thing!)

On the buy side, I believe Boring investing comes down squarely on the side of "investing." When Greg picks a company, he isn't basing decisions on seasonal factors, one-time events, hot new products, or other whispered items. He doesn't look for technical breakouts, momentum, or any other short-term phenomena. He first and foremost looks for good businesses. The companies we own are companies whose prospects look good over the next several years, not the next several weeks. We invest.

Selling is a more difficult issue. Let's say that one of our stocks triples over the next few weeks without any major news. Let's just say that irrational exuberance took over the trading in one of our stocks. Should this stock be sold? Even if the prospects for the company for the next decade look reasonably good, does a 300% move discount those prospects so that the expected return over the next few years appears lackluster? If that is the case, what is a Boring investor to do? Is it "trading" to sell after such a quick run up? Is it "investing" to hold in spite of wild valuations?

I would submit the answer to each of these questions is no. If a well-reasoned analysis of a stock's prospects leads to the conclusion that returns over the next several years will likely be below the historic performance of the general market, what is the point in holding on to those shares? Locking in a profit can be a great investment. Keeping a lackluster stock is certainly a poor trade.

I believe that the decision to sell a stock that has risen must be based on a view of where the stock can reasonably trade 2-3 years down the road. If the returns over that time span can be predicted -- with all of the caveats that go with such predictions -- to outperform the historical returns of the market, the stock of a good company shouldn't be sold. If, however, the run up has been so extreme as to discount earnings for the foreseeable future, selling could well be the best investment. At a minimum, some type of stop loss appears to be in order.

In this market there are a lot of stocks that are overvalued. One of the big challenges facing investors is to look a bit farther down the road and see if there is enough growth to justify the price. Many of these "great companies" have stock prices that are unsustainable. Great companies at a lousy price. Holding on to these shares may ultimately prove to be a very bad investment.

At the present time, none of our Boring stocks is "wildly overvalued," but if they get to that point, you can expect us to consider a sale. And I firmly believe that would be a good investment.

FoolWatch -- It's what's going on at the Fool today.


TODAY'S NUMBERS
Stock  Change    Bid 
 ANDW  +  1/4   21.88 
 CGO   +  5/16  38.56 
 BGP   -  3/4   32.44 
 CSL     ---    51.19 
 CSCO  -  9/16  75.38 
 FCH   -  3/16  35.13 
 PNR   +1 11/16 43.44 
 
                   Day   Month    Year  History 
         BORING   -0.24%   0.89%   4.10%  30.99% 
         S&P:     -0.88%  -1.50%  12.85%  76.18% 
         NASDAQ:  -1.16%  -1.78%  16.86%  76.29% 
  
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     32.44   188.17% 
   6/26/96  150 Cisco Syst    35.93     75.38   109.76% 
   8/13/96  200 Carlisle C    26.32     51.19    94.44% 
    3/5/97  150 Atlas Air     23.06     38.56    67.24% 
   4/14/98  100 Pentair       43.74     43.44    -0.70% 
   11/6/97  200 FelCor Sui    37.59     35.13    -6.56% 
   1/21/98  200 Andrew Cor    26.09     21.88   -16.16% 
  
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  12975.00  $8472.51 
   6/26/96  150 Cisco Syst  5389.99  11306.25  $5916.26 
   8/13/96  200 Carlisle C  5264.99  10237.50  $4972.51 
    3/5/97  150 Atlas Air   3458.74   5784.38  $2325.64 
   4/14/98  100 Pentair     4374.25   4343.75   -$30.50 
   11/6/97  200 FelCor Sui  7518.00   7025.00  -$493.00 
   1/21/98  200 Andrew Cor  5218.00   4375.00  -$843.00 
  
                              CASH   $9447.76 
                             TOTAL  $65494.64