When we created SmartGuyStocks in June 2007, our goals were simple: First, make money for our readers. Second, publish articles interesting enough to actually have readers. Despite less than seven months of operation, 2007 was unequivocally a success on both fronts. Our picks have gained 30.2% vs. a loss of 2.6% for the S&P 500. SmartGuyStocks now has hundreds of direct subscribers, with thousands more reading feeds through Seeking Alpha and Yahoo! Finance. To all of you, we say thank you and hope to bring you another fun and profitable year!
Despite our success thus far, we are always looking to learn from experience and refine our investment strategies. In the spirit of reflection and resolution, here are the two biggest lessons we learned in 2007:
1. Trust your eyes and ears
While financial analysis is important, we’ve learned there are occasions when real-world observations can overpower traditional definitions of a “cheap” or “expensive” stock. At SmartGuyStocks, we have a proven ability to spot companies poised to make a move simply by following Peter Lynch’s famous tried-and-true mantra: “Invest in what you know.”
So when we heard everyone we know pining for a Wii and had no success finding one ourselves after calling over 30 stores, we jumped at the chance to buy shares of Nintendo (OTCPK:NTDOY). Likewise, when we personally experienced Blockbuster’s (BBI) ill-fated Total Access program, we bought puts. When we saw Martha Stewart (MSO) falling out of the national spotlight and her flagship magazine discarded in favor of Real Simple on coffee tables, we knew shares of her company would follow.
However, we missed additional successes because we were hung up on traditional notions of valuation despite witnessing strong real-world trends. For example, we observed and identified the growth and popularity of retailers Lululemon (NASDAQ:LULU) and American Apparel (APP) before each went public, but we dragged our feet buying shares because they seemed too pricey. We take solace in the fact that there will be many similar opportunities in the future; and rest assured, we will no longer second-guess what we see and hear. We have learned it is better to start a small position in these “expensive” stocks rather than miss the boat. If these picks have the potential to become 5-10 baggers or better, then a small position can still yield awesome results.
2. Intelligently buy and hold
Time and time again, retail investors are reminded to “buy and hold.” Investment writers urge us to sit tight through all the ups and downs, no matter what. Pick good companies, close your eyes, and check the Wall Street Journal again in 30 years to count up your riches. While I certainly do not want to break with this established canon of stock market strategy, I think that investors are leaving money on the table if they are not practicing “intelligent” buy and hold.
Intelligent buy and hold dictates that you regularly follow your investments and look to act on major news or price moves. For example, we recommended Radvision (NASDAQ:RVSN) as a play on the growing demand for videoconferencing. But we immediately sold when this “growth” stock cut third quarter sales and earnings guidance twice and admitted it was losing market share due to a missing product feature. Despite taking a loss, we prevented an additional 25% downside that a traditional buy and hold investor would have realized.
Similarly, when small-cap industrial distributor DXP Enterprises (NASDAQ:DXPE) announced earnings that fell just short of expectations in July, we re-examined our position in the company. Despite the 35% share price drop, we couldn’t find much wrong with the company’s fundamentals. Although earnings missed expectations, these were expectations set by a paltry two analysts who track the stock. Further, profits and sales still grew tremendously over 2006, and management reiterated they were seeing strong demand and expected enhanced growth going forward. With our investment thesis still intact, we took advantage of the market overreaction and doubled-down on the stock. The next quarter’s earnings were as strong as management predicted, and we later sold this stake for a huge 42% gain in four months.
Going forward, we will continue to see large price drops or gains in our holdings as an opportunity: a chance to cut losses with a negative story, or add to our position with positive news or a market overreaction. While buy and hold can be profitable, intelligent buy and hold can be downright lucrative.
With these two new lessons in the trading diary, we look forward to a very successful 2008! Thanks again for all your lively feedback and support!