kumar,
Great, great question. So good that only you have the answer to it when it's your money on the line.
If I want to buy into a chosen Gorilla, with the intention of holding on to it for a lot longer than 2 years (until a discontinuous innovation unseats the Gorilla), to what extent is current valuation important in my purchase decision ?
I wish I could share with you an e-mail sent to me just this weekend. For privacy reasons, obviously I can't divulge the details. But the gist of it is that the writer appeared upset that the purchase of some Gorillas in February and March resulted in current losses that might require years to overcome.
To that writer, I believe the valuation mattered. For the author of that e-mail, we can all hope the paper losses will become paper profits in very short order knowing full well that is indeed possible. Yet we also know that it might take a lot longer to recover those paper losses than he or she ever gave serious thought to.
Any time we have an opportunity to purchase a stock, we have alternatives. We have the option of simply waiting until the stock lowers as happened to most stocks in the last few weeks while risking that the stock will forever go onto higher levels as we've seen happen repeatedly. We have the option of waiting until the fundamentals change to the point that the valuation seems "safer" (however each of us might define that term), even if it means buying the stock at a higher price at a later time. And naturally, we always have the option of buying the stock of a different company whose combination of prospects and valuation appears to be a better investment.
To the extent that each of us does or doesn't care if the stock of a Gorilla tanks big-time after we buy it, the answer to your question will be different. To the extent that we do or don't care about the answer to that question, each of us will weigh our thinking about that differently in context of the above inherent alternatives.
Let's use Gemstar as an example. I've got a list on my hard disk of 31 people who felt awhile back that Gemstar is a Gorilla. Assuming most of those people still feel that way, I have to believe that at least one or two of them might be reasonably concerned -- maybe outright pissed off (excuse the vernacular) -- about having bought that Gorklla a few weeks ago when the stock was priced north of $107, only to see it precipitously fall 65% since then. And having seen it fall 65%, they know it only has to fall less than 30% from the current level (certainly plausible because that's less than half as far as it's already fallen)for it to lose three-fourths of its purchased value.
The people who would be upset with that scenario might wonder if they couldn't have done a better job of assessing the risk and gone with a different stock or waiting for it to lower at least somewhat before buying. But the people who would have no reason to question their judgement using 20/20 hindsight might not care at all. That's why the answer to your question will be different for every person who has to answer it.
The really important issue is that you asked the question all of us should be asking any time we buy a stock: to what extent is current valuation important in my purchase decision? The reason it's important and I'm so very glad you're raising it that way is becase we have to live with our answer whether or not we take the time to ask the question in the first place.
--Mike Buckley |
