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I Love a Falling Knife

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By emiller8988
July 6, 2004

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Pos said something that got me to thinking...
I've got a lot of scars from trying to catch them falling knives! I don't predict the end anymore, I wait for confirmation. Judging by your posts, I suspect you do too! post 31582

I love a falling knife.

Come to think of it, I catch falling knives all the time. I love averaging down. What is most important to me is that the company is worth more than I'm paying for it. Up down or in between... what I really want is a good buy. I don't need the best buy. I don't care if it goes down further after I buy it. That's what enabled me to buy MRK right at it's bottom, though I didn't get all I wanted. I recently bought GRMN exactly at it's recent low... because that was my "start buying" price.

Once I get it figured out what CAH is worth to me, I won't care what direction it's going when it hits my price... I'll take it, at least a taste of it.

Every good value manager I know catches falling knives like they were circus acts. Whitney Tilson recently said he's almost always early with value buys and the equity he purchases will often drop another 20% after he buys.

I think I know what the secret is for me. The secret is to never buy a complete position on the first buy. That way if and when the stock goes down further, you average down with it. I did that with ACUS. I started buying at $9... but only a small amount. I had decided how much I wanted to own and placed GTC tiered orders at 8 then 6.5 and then 6. (I had orders at 7 and 7.5 but after thought, I cancelled those). The orders are for equal cash amounts (not shares)... so, for example, lets say I wanted a $4000 total position in ACUS.... what I do is place the following orders....


$1000 at 9
$1000 at 8
$1000 at 6.5
$1000 at 6

With ACUS they all executed and my total buy in price averaged out to $7.10.... so even though the stock dropped by 40% since my first purchase, my average in price puts me at only a paper loss of 10% and my largest purchase was right at the bottom (so far, gulp.... lol). I would challenge anyone who wants to wait 'til the dust settles with ACUS to beat that "average in price". As I think there is a good chance ACUS will be worth $100 a share in 2010... I am delighted with the present position. Today with super cheap commissions you can even afford to break up a 50 share position into two buys.

Here is what that does for me. When I find a stock I really like I rarely get a full position but I am almost always happy with the price I get. When I don't get the full position... I've just got a few extra bucks and I get the treat of looking for another company.

When I do fill out, the big purchase is almost always right at the bottom and its usually no time before I'm in the black. But who cares about how quick I'm in the black as long as I'm pretty sure I'm buying dollars for 50 cents... if I do and then the dollar drops to 35 cents, I'm OK and can hopefully snarf up a few 35 cent dollars on the way.

Falling knives have been some of my most profitable buys...you don't have to hit it right at the bottom. You do need to be confident enough in your 50cent dollar that you can wait for Mr. Market to realize his error.

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