Catching Flak, Eating Crow, and Holding Ground

Sunday, December 10th:

First, as a reminder to all my readers, I am not a professional analyst or investor. Any decisions you make to buy or sell should be your own after you've done your own research. I have received a lot of email lately pointing out what a bonehead I was for recommending IDCC and PFE. Yeah, I took two big hits there, but surprisingly have still made money on both these stocks.

As, one reader pointed out, the IDCC change in earnings guidance caused a precipitous drop in share price down from about $32.70/share to $29/share. Ouch, that's 10%... however, remember that I first recommended the stock at $32/share, and it's now only at $31.69/share. Only a .31/share loss. However, first thing on December 6th when most people were dumping IDCC, I used it as a buying opportunity and scooped up shares as low as $29.50/share, which I sold (to free up capital) at $31.50/share. This means that I am up since my original Nov. 6th recommendation. For those of you that bought on Dec. 4th, last time I recommended it, I'm sorry for your short term loss, and hope you didn't dump shares on the drop. Sometimes you have to feel some pain before the gain. Personally, I'm going to hold on to the shares I have, and will probably do so for about 6 months or more. Although many people like to flip stocks over short time scales, given the current market environment I'm not afraid to hold them, do homework, and wait (see comment on Dec. 5th post "Drug Sector Play" for explanation of IDCC price drop).

Pfizer: PFE dropped big time when they canned Torcetrapib, it's drug designed to be taken with Lipitor, which was supposed to raise HDL levels in people at risk because of high cholesterol. This drug was supposed to be revolutionary. Unfortunately, it raised the chance of death. Thank you PFE for being honest about this and pulling it now instead of at a later date. This was a surprise that took everyone in the market by surprise: the CEO was apparently in the shower when he answered the phone and found out about the Torcetrapib problems... so, this was a complete shock to everyone. I also treated the PFE dip as a buying opportunity, and was able to recover half my losses that way. Combine that with the recovery and I'm now about even.

I'm rambling a bit here, but want to make two points:

1. There always exists the possibility for market surprises. The PFE news caught everyone, even the CEO by surprise. The IDCC earnings guidance caught about 90% of the market by surprise. No one in the history or future of the market will be right all the time or will predict every move.
2. Always keep money on the sidelines to capitalize on big news, one day drops. I always try to have about 10-20% cash in my portfolio exclusively to buy on weakness. People nearly always panic on bad news, and drive the stock below what it's new value should be. This often results in a significant rebound, which you can capitalize on to recover some of your losses. Any good money manager will tell you with a good underlying business, the stock will come back.

Remember, we all way to buy low and sell high. Sometimes however, you have to be patient and buy low, stock takes hit, but lower, stock rebounds, sell that bought lower to recoup some short-term loss, wait patiently as stock price increases, and then sell high.