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By babyfrog
July 13, 2004

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Once again, I am the not so proud owner of a company that looks very much like it will drop like a rock on a single day. Fair Isaac, (NYSE:FIC) announced after trading hours this Monday that its fiscal third (ending June) and fourth (ending September) quarter revenues and profits would be hurt by "one time" slowing of software sales. In after hours trading, at least as reported by yahoo's quote service, the company dropped over 15%, to $26.53, down from the market close of $31.36.

As you may or may not remember, I own a few shares in FIC, as discussed here. This drop will most likely be reflected in or around the company's Tuesday opening price and likely throughout the day.

When I looked at FIC just over a month ago, this news was not public or known to me. As FIC has a presence in the software industry, I suspected it might be hit by the same slowdown affecting the rest of the industry. Unlike the 'one quarter delay in purchases due to an inability to close contracts in June' excuse that has been the software industry's cry thus far, FIC is actually forecasting bad sales for the current quarter as well as the one that just closed. As such, FIC is getting hit hard, based on not only worries for the quarter that just ended but also on worries for the quarter that is just getting under way.

As I've mentioned before (see here and here ), my overall portfolio has been remarkably resilient to huge swings due to single company problems. I attribute that quality in great part to the fact that I keep an eye out for diversification when picking individual companies to buy. That keeps one company's stumbles from necessarily impacting other parts of my portfolio. While I cannot predict the daily fluctuations in the market, I will say that I am looking forward to seeing if the diversification across my portfolio will once again perform its magic and protect me from a one-company stumble.

I try to pay no more than what looks like a fair price for the companies in my portfolio, but without crystal-ball style knowledge of the future, I cannot know for certain that the companies I do buy will meet my projections. Additionally, as can be seen by today's after hours tumble of FIC, once the news gets out that something less than ideal happened, the market can react far, far quicker than I can. The bad news is now priced in to the company's valuation, and I need to look at the company based on what its expectations are for the future in light of its post-announcement price to see if it is fairly priced for the new reality. And that I will do, during my upcoming quarterly evaluation of the companies I partially own.

Fortunately, that evaluation window is not until August, so I will not have to make that assessment while the news is still fresh and the data and market for the company still tainted by emotional panic. I plan to rely on a combination of my overall portfolio's historical resilience and a continuation of my Benign Neglect policy to carry me through the daily fluctuations until I get to that review. In the meantime, my focus on companies that pay and grow their dividends over time means that, even if FIC were to completely fail (which I do not expect), my overall portfolio dividend income for this year will likely exceed what it was last year.

This isn't the first time I've had a company drop like a rock while I've held it, and it more than likely won't be the last time. By owning a variety of presumably fairly valued companies in different industries, I've been able to persevere while these problems happen to one or another company. By focusing on companies that pay and grow their dividends over time, I've been able to see my total investment income increase, even as individual companies may stumble. By reviewing the companies in my portfolio once a quarter, I've been able to help assure that I can focus on price as it reflects the future and expectations, rather than only on as it reflects the past and announcements.

It's my four step combo:
1) Buy companies that look no more expensive than fairly valued.
2) Look for decently priced companies in new-to-me industries, to help assure that diversification protects me from single company or industry stumbles.
3) Focus on those companies who have increased and look likely to be able to continue to increase payouts to owners.
4) Review each company quarterly for potential pruning if the price seems to reflect a future far rosier than expectations.

This combo helps me keep an overall pretty healthy portfolio, even as individual companies within that portfolio may stumble.

Once again, I am forced to eat crow as a company I partially own falls precipitously on bad news that I did not foresee. Once again, however, I am relying on my philosophy and strategy to carry me through the short-term fluctuations and on to (hopefully) greener pastures in the future.

-Chuck


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