Wednesday, March 11, 1998
by Phil Weiss
TOWACO, NJ (Mar. 10, 1998) -- Its Wednesday again in the Cash-King Portfolio which means that its time to answer some questions from the Cash-King Message Boards. First, though, we have not yet carried out the purchase of our RP4 Foolish Four stocks. That will be coming in the days ahead. If you haven't read our buy report on those, please do here at: The Cash-King's RP4 Purchase Report.
Ok, on to our question of the day...
A Fool who goes by the moniker Wlipke asked, "What criteria are used for selling a Cash-King? Do you run the numbers for a few quarters before making a judgement? If so, what formula do you place greater emphasis on?
Wlipke, selling a CK stock is an issue that we've kind of danced around here. We have said that were buying companies that we plan to own for at least the next ten years. But I do think that there are times that Cash-King stocks should be sold. I can think of two reasons off the top of my head.
The first would be if Ive lost faith in anyone's ability to execute the company's business model. If the model has fallen and can't get up, I feel it's time to move on. This sort of collapse will usually be pretty well-represented on the balance sheet. Because we focus so intently on that financial statement, I feel like we'd be able to get out of a permanent dog before its howls grow maddeningly loud.
This isn't to say that we'll sell any of our stocks that fall more than 40% in value. Again, one of the greatest investments of the 20th century, Coca-Cola, fell 67% in value in the 1970s. If we believe in the business, we'll hold through that sort of free-falling. But if, qualitatively, we think the business model is dead meat and quantitatively that death shows up on the balance sheet, we'll look to sell.
The second reason I'd sell would be if I no longer trusted management (or the executive board's control of management) because I felt that, on major issues, theyd not been up-front with shareholders. I'm a pretty forgiving guy. Failure isn't unacceptable in my world. In fact, it's necessary and, on different levels, it visits us everyday. I don't care to attack my companies about their failures, anymore than I like to do with my friends. But what I won't tolerate is deceit. Defined separately from a mistake or two in communication, for me deceit here is a methodical, intentional dishonesty designed to put me at a disadvantage as a part owner of the business. A perfect example is when executives bail on substantial amounts of their stock in advance of horrible news -- yet in advance, they were painting a rosy picture for investors.
I'll be even more direct on this second reason for selling. At the time that Oxford Health Plans (Nasdaq: OXHP), one of Toms MoneyHeavy Portfolio stocks, first announced its difficulties and accounting irregularities last October 27, I stated on the Cash-King Message Board that I felt that this was a stock that should be sold. My reason was that I felt that the company's management had been misrepresenting their performance to shareholders and to the stock market in general. Further, it sounded to me as if they had no real idea at all about the performance of their business. My intuition took over, and in some vague way I saw a combination both of misleading information and a business model that might be dying.
The events in subsequent weeks then most definitely led me to lose trust in the company's management. For over a year, they'd been saying everything was okay -- even when other HMO businesses shared various problems and announced restructuring plans. Not Oxford. Oxford continued to paint its picture with broad, bright strokes. Then, ka-blammo! Now, usually, I think that shareholder lawsuits are garbage. But this is one time I could certainly see the merits -- if only shareholders took a little more away from settlements!
Those are two of my reasons. But for me, failing to achieve one (or even a few) of the criteria that are discussed in Step 6 of the 11 Steps to Cash-King Investing would certainly not remove a stock from Cash-King status. For this reason, we have no simple and numerical model for selling Cash-King stocks. After all, there's no simple and numerical approach to buying the stocks, either. In fact, each of our stocks have violated one of our principles. The key for us is being able to explain why the company falls short of some standards and determine whether that's bearable or not.
We'll be writing a lot more about selling in the months ahead. I don't mean to gloss it over here. It's just that we don't have simple sell rules or overly-simple buy rules. The two above are pretty good reminders, but neither of them can be narrowed down into a mathematical equation. They're both judgement calls on many levels. Is the business model not just wounded, but dying? Is the management being dishonest with me? Important questions to ask, neither of which can be answered in catchphrases.
That's all for today, Fools. Dont forget to take some time out tomorrow to catch the beginning of the NCAA Tournament. I keep hearing so many good things about Duke hoops heading into this tourney. Of course, I may be listening extra careful for it. :)
Phil Weiss (email@example.com)
Stock Change Bid ---------------- KO - 1/4 72.44 INTC + 3/8 75.81 MSFT - 13/16 80.63 PFE - 3/8 87.50 TROW + 1/2 69.50
Day Month Year History C-K -0.06% -1.11% 0.63% 0.63% S&P: +0.40% 1.82% 6.71% 6.71% NASDAQ: +0.48% -0.77% 6.29% 6.29% Rec'd # Security In At Now Change 2/3/98 22 Pfizer 82.30 87.50 6.32% 2/27/98 27 Coca-Cola 69.11 72.44 4.82% 2/6/98 28 T. Rowe Pr 67.35 69.50 3.20% 2/3/98 24 Microsoft 78.27 80.63 3.01% 2/13/98 22 Intel 84.67 75.81 -10.47% Rec'd # Security In At Value Change 2/27/98 27 Coca-Cola 1865.89 1955.81 $89.92 2/3/98 22 Pfizer 1810.58 1925.00 $114.42 2/6/98 28 T. Rowe Pr 1885.70 1946.00 $60.30 2/3/98 24 Microsoft 1878.45 1935.00 $56.55 2/13/98 22 Intel 1862.83 1667.88 -$194.96 CASH $10696.94 TOTAL $20126.63 *The year for the S&P and Nasdaq will be as of 02/03/98