'Buy up to' Prices: 'Buy up to' Prices and the Logic of the Long Term

Justice Litle discusses what ‘buy up to’ prices are, and how he determines them for stocks he recommends.

A number of readers have written in and asked about the ‘buy up to’ prices in the Outstanding Investments portfolio.

For those of you who asked how the ‘buy up to’ concept works, your assumptions are correct. The idea is to pay ‘up to’ a certain price but not more.

Keep in mind that the buy up to price is more of a suggested guideline than an absolute hard and fast rule. Those of you who trust your own judgment are no doubt already doing just that; those of you who are unsure whether to trust your judgment, I encourage you to do so. Ultimately you must employ your own judgment, regardless of how detailed the advice from myself or anyone else, as no one can make the most important decisions except you.

When purchasing a stock for long term investment, intermediate term investment, or just a trade, there are many decisions you and you alone have to make-how many shares to buy, what percentage of your portfolio to allocate to the position, to the industry, to the sector, what your risk tolerance is, how actively you prefer to manage holdings…

A newsletter cannot make these important decisions for you. It can only offer general guidelines, intentionally designed to encompass a broad audience that may not encompass the specifics of your particular situation.

This is true of all newsletters, not just Outstanding Investments. The particular investment vehicle (stock recommendation) or market outlook (energy / metals are expected to do X) is just a start. In terms of real-time execution, every investor’s situation is unique in some way, be it in regards to risk tolerance, available capital, overall portfolio allocation, style preference, or a number of other factors.

Also keep in mind that if the buy up to prices were automatically adjusted to meet the market wherever it is-that is to say, if ‘buy up to’ always meant the current price-then there would be no point in listing a buy up to price at all, as the guideline would simply be ‘buy now’ at all times. That would be superfluous.

‘Buy up to’ Prices: Have a Solid Position

As far as long term investing goes, when to buy in and when to wait for a better price is a tough question that no one has found an easy answer to – especially when dealing with ‘hot’ sectors getting a lot of speculative attention. Our areas of focus certainly qualify as hot, if not red hot.

In the long run, it is still early days for the natural resource/energy and metals/infrastructure boom. In the short to medium run, however, the advance of these markets will look more like a jagged saw-toothed mountainside than a smooth straight line. There will be dips and setbacks, occasionally quite hairy and prolonged setbacks that will test even the strongest of convictions. These setbacks are the most favorable times to ‘load up,’ always with a mind for maintaining a longer-term perspective and not taking on more risk than one can handle.

The best situation to be in is to have a solid position in a stock, with an average cost considerably lower than the current price. When you have such a base, you can add to your position in incremental amounts when conditions are favorable, i.e. after a correction or on recognition of a new breakout higher.

You can also take partial profits when the market gets ahead of itself, cashing in on speculative run-ups while maintaining a core position. A solid base position lets you play to your own style more comfortably, be it watching and waiting patiently in the knowledge that you are deep in the money, or moving in and out more actively in the knowledge that you prefer cutting losses quickly and avoiding the sideways to down movements. It is not a question of which method is superior (stoic patience vs. active management of the ups and downs), but which better suits your personal temperament.

Like money in the bank, a solid core position makes life easier either way.

“Well, that’s all nice and good,” you say, “but I am a new reader and have not established such a wonderful base camp of positions yet. What am I supposed to do?” First of all, remember that bit of timeless advice from the Hitchhiker’s Guide to the Galaxy: Don’t Panic. You will have opportunities to establish your base position over time when our markets reverse and correct and retreat, as they will definitely do on occasion – sometimes more viciously than we would like.

At any given time, the market ecosystem supports a broad number of styles and strategies, all operating at once in the here and now. You have long term investors, mid term speculators, short-term day traders, and quant-driven program traders all operating at any given moment of any given trading day.

The Outstanding Investments portfolio is oriented to the long-term investor. We want to be the guys and gals who say “Yep, we established our base positions back when Old Yeller was a pup. It’s been a wild and crazy ride, with a lot of hunkering down and a fair bit of profit taking along the way, but most importantly we made it to the end.”

Imagine what it was like investing through the 1970s (or recall it if you were doing so). By the time that cycle ended, the upside insanity was a sheer white heat; circa 1980 or so, you had the majority talking about how inflation would be going up forever. The fever was so extreme you could fry an egg on the patient’s forehead.

These days, Wall Street hasn’t even really acknowledged that inflation is back, even with gold and silver at multi-decade highs. While energy stocks have been top performers, there are still plenty of folks who think $35 oil is around the corner still. We are nowhere near the 1980 crescendo, years away from it most likely. There is still plenty of time to build a long-term base position before we get to those insane (and insanely profitable) days.

When things get that wild, though (imagine gold at $2,000 for example), having a base position established at lower levels will be more important than ever; the volatility will be too tough to stomach otherwise. But here and now we are still years away from the crescendo, so you don’t have to feel tied in knots by a sense of urgency.

You want to establish your base camp with patience, looking for those correction periods and favorable consolidations that keep you from getting caught out by a speculative rally. As Dennis Gartman points out in his “rules of trading” for John Mauldin’s recent book, Just One Thing, mental capital is as important as financial capital (actually Gartman says it is more important).

This is a big reason why you want to have patience in picking your entry points, and cultivate fortitude based on a longer-term perspective. If you are ever frustrated by a stock that feels like it is ‘running away’ from you, keep these points in mind.

For those of you who want more on the subject of portfolio management, trading around a core position and so forth, the best advice I can give you is to read “Reminiscences of a Stock Operator” by Edwin Lefevre if you have not already done so.

I have read it at least half a dozen times over the past decade, and each time it was like reading a brand new book. The book was the same, of course, but the additional experience I had accumulated between each read gave me brand new eyes. In fact as I think about it, it is probably time for me to give Reminiscences yet another read.

The original plan for the upcoming issue was to run Part II of the comprehensive portfolio review, but we are going to put that on hold so I can send a new recommendation your way. As with a few other recommendations, this one may surprise you – though I hope you will agree the logic behind the pick is compelling. Look for that next week.

Warm Regards,
Justice
February 5, 2006