The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

08 January 2008

How now, brown cow?

Lu/vmw writes,
"How do you think about VMWare/VMW right now? Seems the whole market is pretty weak. Is it still a good entry point for long?"
"looks like your expected $71 was touched... However, the market is too weak... Every dip causes more panic on vmw... have you already entered?"
"I read your post one more time. Seems the expected upside resersal has not come. And, the market entered into a down trend. Do you still think it is still a bullish setup? I entered it above $90 and then read your post here. Now, I can only think about holding it for a long term (maybe, over a year). Now, I am really worried that it will shrink to a price under $50 and won't come back forever... As far as its product, it is not someting like google. It is something invisible for end customers and thus not so obvious. Maybe, this is a risk as well as an opportunities as you said."
The first item to keep in mind is that the stock is not the company, and that the market is not the stock. Let's deal with this reality in reverse order. In a letter to clients (dated 1 January 2008), I wrote,

"At the end, 2007 proved a difficult year in the markets. The equity markets had a dismal year -- up, down, and sideways, sideways, sideways; for example, while many commodities soared in price, their underlying share prices failed to keep pace.

"Activity of this sort confounds most investors; believing they must track the market step for step, they buy and sell, only to re-purchase, and all to no avail as they trade themselves silly.

"This lack of vision is not one that plagued your portfolios. Via diligence and discipline, I actively seek the market's leaders, purchase them at opportune moments, and then hang on for the long term (read: higher prices). Not every decision was perfect, but I am quick to admit errors, and then move on to the next opportunity. Your portfolio's return during the difficult year just ended reflects this successful investing perspective.

"At this moment, however, 2008 looks more... perilous than 2007 proved to be. Nonetheless, patience, discipline, and investment savvy and shrewdness will continue to win the investment race. Already I have identified two new opportunities that should help drive additional gains during the coming year..."
And, in mid-December, I shared with a handful of investors whose investment savvy I respect (I call them the Sounding Board) that I expected the equity markets to float higher into year-end, gap higher strongly on the opening of Wednesday, 2 January, reverse intra-day, close weak, and then usher in several weeks of plummeting share prices. All before finally stabilizing.

The point of sharing these items is not that time proved me correct -- I am too often wrong to crow about the random correct call -- but to reify the notion that I expected the markets to decline, but that expectation did not lessen my interest in VMWare/VMW. In fact, because my methodology is to purchase declines, the market weakness in general and VMW's share price in specific thrills me.

So, okay, the market's oscillations we understand, and accept. But what of, in this case, the plummet (or "panic") in VMWare/VMW's share price? Long time readers will know that I differentiate between a company and its shares; they are not synonyms for the same thing. "It is better to be in the wrong stock at the right time, than the right stock at the wrong time." Clearly, VMW shares have declined alongside the markets, but is its price weakness reflective of general market weakness or is something suddenly and horribly awry at the company?

You can guess my response; I believe the former, and dismiss the latter. I find opportunity in price (and time) oscillations; that is, these oscillations create the opportunities for us investors. To wit, the email message just now received...

Hi David -
How have you been? I haven't talked to you in a while but I still read your blog every single day.

I had a quick question for you. Today I purchased a sizable amount of ISIS as it hit its 200 day SMA. I was very pleased to see the stock bounce so well off this support and was simply shocked to see it up over 50% in after hours today. I have never in my life timed the purchase of a position so perfectly and I have you to thank for bringing this opportunity to my attention many months ago.

My lack of experience now leaves me pondering what to do and thus I turn to you for some expert advice. I have never been in a situation where my long term objective for owning a stock was hit in the first day I purchased it. While very exciting, I now struggle to decide what to do with my shares? Do I continue to hold, take some off the table or sell my entire position? How would you handle this situation? How do stocks typically perform after such huge gaps up like this?

I apologize in advance for my barrage of questions, but please understand my excitement. Thank you again, David - you run the best finance blog on the web today and I can truly say that I am lucky to have met (virtually) such an amazing person.

Kind regards,
Chad Lapa
President & Founder, BlueEye -- Professional Finance on a Personal Level -- We make good fisherman, even better
Chad found opportunity within seeming chaos; already familiar with Isis Pharmaceuticals/ISIS, he only awaited a decline in the stock's price. The recent plummet (to ~$12 from ~$18) provided both the signal and opportunity. Chad acted boldly, and now gets to reap the reward.

The objective, when investing, is to have your portfolio increase in value over [the passage of] time, and not fret overly much about yesterday's, today's, or tomorrow's price. Of course, easier said than done, I know. Read again Chad's letter, and consider the uncertainty he embraced when he purchased at an optimal moment and in the teeth of a prevailing headwind -- which has nothing to do with the reality that the share price reversed higher immediately after his purchase. 'Twas nice, but not always like that! I would bet that, knowing what he knows now (about successful investing, not how ISIS shares soared in price after his purchase), he would purchase even more shares than he did.

So, Lu/vmw, you should not fear VMW's share price decline, but instead perceive it as an opportunity. How low is low? I know not, but as the old quip has it, "If you like it at $80, then you will love it at $70!" Do I own the shares? Yes. Will I purchase more shares? Yes. Do I think "forever" must come to be before the share price again climbs over $90? No. Would I prefer the share price had not declined this low? Yes.

I include Chad's letter because it is a nice balance to an investor's usual fears; he purchased during an ugly, ugly market day, and recognized a pattern amid the swirling chaos and shrieks of pain. Alas, then, that I also must answer his questions...

I believe ISIS shares could trade substantially higher in the coming weeks and months, and for many reasons. The news (via that propels higher the stock after hours today (Monday):
"Isis Pharmaceuticals/ISIS and Genzyme/GENZ announce that they have entered a major strategic alliance in which Genzyme will develop and commercialize mipomersen, Isis' lipid-lowering treatment for high risk cardiovascular patients that utilizes novel antisense technology. As part of the strategic relationship, Genzyme will also have preferred access to future Isis drugs for C.N.S and certain rare diseases. Genzyme will pay Isis $150 mln to purchase 5 mln shares of Isis common stock for $30 per share upon Hart-Scott-Rodino clearance. Upon completion of final contracts, Genzyme will pay Isis a $175 mln up-front mipomersen license fee. In addition to this initial $325 mln, Isis has the potential to receive significant milestone payments for mipomersen, which is currently in phase 3 trials. Once the product is launched, the two companies will share profits."
Need I state this is big news? (Obviously so, David!) Need I say this puts the stock in play? (Remember I argued the possibility that Pfizer/PFE would acquire the company; this news makes any buyout much more costly.) Add the chart pattern itself: $18 represents a landmark breakout; while the shares could test again that level in the future, they need not do so. It is appropriate to ask here and now the inverse of my posed question in reply to Lu: "How high is high?" Only time will tell.

"I now struggle to decide what to do with my shares..." You answer your own question, Chad: " long term objective for owning a stock was hit..." There is no such thing as superior information; we each would drive ourself crazy thinking ourself to be so smart that we could master-mind the market's squiggles. My counsel is to leave off the attempt. You made an assessment of both risk and opportunity (reward), Chad, and in advance of market action; do not allow subsequent market action to dissuade you from your logical analysis. Investors get into trouble when they become emotional. So what if you sell some (say, half), and the share price continues higher? Guess what -- that higher price also validates your analysis.

In the final analysis, I have one word for you: Congratulations.

In a follow-on comment to my post below re VMWare/VMW and competition, I should mention that my analysis might seem, at first glance, to be simplistic, perhaps even idealistic. One reason for that conclusion would be that I neglected to tie up some loose ends. To put a fine point (and closure) on the topic...

Yes, competition is a good thing for all companies, but proves more pernicious for technology companies than for fast food restaurants. (I referred to Chipotle/CMG.) To endure, technology companies seek a wedge against its competition; this wedge commonly assumes the shape of either a solid brand identity or patent protection. Yes, competition is a real risk for VMWare -- a risk I limned sufficiently well, but also one that I suspect the company will hurdle successfully.

Full Disclosure: Long the shares of VMWare/VMW.
-- David M Gordon / The Deipnosophist

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