To: Secret_Agent_Man who wrote (22167 ) 8/18/1998 12:17:00 PM From: RocketMan Read Replies (1) | Respond to of 50264
I have had an interesting discussion in PMs with a very intelligent and methodical lurker. It is important to have an intellectual basis for investing and holding a company. Otherwise we buy and sell on the basis of emotion, momentum, etc. Fine if you are a pump and dumper or a day trader, but not for a long holder. Also, having an intellectual basis makes it easier to quit looking at these ticks that MMs like to play with, trying to erode our position. A "reward/risk" ratio is simple, but it might be helpful as a way of evaluating DGIV. Say risk goes from 1 to 10, with 1 being low risk (e.g., MSFT), and 10 being high (choose your own favorite high risk company). Make reward go from 1 (low) to 100 (high), say in terms of price multiples. So a 1 means the price would stay the same, 10 that it would be a 10 bagger over some time frame. Let's not have negative numbers, since you would not invest in a company that you predicted would go down. Now, say you plan to hold for, say, 2 years. What would MSFT be? Maybe 2/1 = 2? (a $200 stock) Maybe even 3/1 = 3? (a $300 stock) AOL? Maybe 3/2 = 1.5? (a $300 stock) Heck, let's be really bullish and say 6/2 = 3, a $600 stock, but with the same reward/risk ratio as MSFT. How about in our own industry? IDTC? Maybe 3/3 = 1? (a $75 stock) I don't know, choose your own figures. Now, what would DGIV be? Let's say the risk is 7 right now, without financials. At a risk of 7, we would need a reward of 10.5 to equal the 1.5 ratio of a MSFT. That means a $31 stock price in two years to equal MSFT's ratio. That is in the ballpark with IDTC's current price, and we are not even listed yet! Now, suppose the reward is as high as 20. Since we are speculating, suppose it is 50. That would only be around a $17 price following a 3 to 1 split. Remember, we are talking two years from now, not tomorrow. At 50, that is a ratio of 7.14! Higher than all of these others, although with higher risk. Do your own calculations, and come to your own conclusions. And if you can find a better reward/risk ratio than DGIV, buy it!