Greedy When Fearful

Every year I always have at least one investment that doubles. More often than not, this is a turnaround story.  Today’s losers might be tomorrow’s winners. Here are the three steps I use and some examples of the companies it’s worked on:

1)      Make a shopping list of your favorite companies.

2)      Spend a minute each day at market close browsing the 52 week low lists (NYSE and NASDAQ). When any of your favorite companies hits a 52 week low find out why.

3)      Is it a short term problem or a permanent problem? If it’s a permanent problem, sell. If it’s a short term problem (10 years or less), buy! Diversification is crucial here. Lots of swings will lead to a home run.

Some examples from my personal portfolio are:

Ford (F): Bought at $2.56 a share on April 2009 when Mitt Romney was saying the auto companies should go bankrupt. Everyone thought they would. Ford did not declare bankruptcy. By August 2009, Ford hit $8 a share. More than a 300% gain in four months.

Mako Surgical (MAKO): Bought at $22.43 a share on August 2011 during the American debt downgrade panic which took everything down with it.  MAKO is now trading at $42.12 a share. Almost a 100% gain in nine months.

Netflix (NFLX): Bought at $77.58 on October of 2011 during the Quickster debacle. Netflix now trades at $106. Almost  a 40% gain in six months.

Now, this system isn’t perfect by any stretch. Step 3 requires great judgment. It is what separates Warren Buffett from us mere mortals. I bought GM with Ford, and GM went bankrupt. I’ve been buying National Bank Of Greece (NBG) for 2 years waiting for it to turn around with the Euro crisis. Time is your biggest asset. This is great for keeping you engaged and excited. Also, it will just help you find a double from a potential bottom on one purchase. I bought Netflix as high as $205 a share. Picking tops and bottoms is impossible. However, by increasing the amount you invest as a stock falls you lower your cost basis as you wait for the turnaround. Like a pyramid, as you get to the bottom your purchases grow in size. Though I started out with a cost basis of $205 with Netflix, my average cost is now half that. This strategy is more of a way to use a Thor sized hammer on your favorite investments. “Thor, Might God Of Thunder! Hammer thy average price into thee ground!” (I’m really excited for The Avengers).

At market close yesterday, Electronic Arts (EA) hit the 52 week low list. This is one of my favorite companies and a major player in our video game investing basket (Currently Activision Blizzard (ATVI), Electronic Arts, Nintendo (NTDOY.PK). That covers step 1 and 2. What about 3? Well, the video game industry is in a period of decline, a period of major transformation. Facebook and  other mobile gaming from companies like Zynga and iTunes have lowered the profits and increased the competition. Can the legendary EA survive and thrive within the next decade? Or, will they fall the way of Atari, Sega, Midway, etc.? The video game industry is incredibly difficult. But, with 1.5 billion war chest of cash and 500 million in debt from buying  Zynga (ZYNGA) rival PopCap,  I think so.  They hold some incredible franchises (Madden, The Sims, Mass Effect) and are strongly moving into social network games through PopCap (Bejeweled, Plants Vs. Zombies). My old class mate Evan Bell even worked on their latest hit Star Wars: The Old Republic and invited me to be a beta tester. The game looked absolutely incredible but my slow computer couldn’t handle it.

Today EA is losing the stock market war against Zynga.  With a current valuation that’s almost half of Zynga (5 billion vs. 8 billion), I think they will be tomorrows winner.

Will EA be my 2012 double?

Monty