Friday, July 24, 2009

Midas where my mouth is

It's like I have the Midas touch, only it's not everything I touch turns to gold -- it only turns to gold after I sell it. A month ago, I wrote about Intuitive Surgical to illustrate a point about stratospheric price/earnings ratios, and the absence of rational pricing. I noted that while I believe in the company, I have little confidence in the stock market, where values are determined more by Ponzi-like expectations (othewise known as capital appreciation) than anything else.

I mentioned how a year ago I sold half my holdings in ISRG only to see it skyrocket 50% overnight (after I sold). Well, it happened again. On July 21st, I sold my remaining shares in the company, at about a 70% profit over my purchase price three years ago (but about half the price I sold shares for a year ago). A decent return, but not enough to buy a yacht. Funny thing happened (again!): it's now trading for about 30% more.

Now, my point is not to lament lost paper profits. At a P/E ratio currently of 44, it's less attractive to me now than it was a month ago at 35. Sure, I'd have been happier to lock in the extra profit. But that's the trick. How do you know when a mob of buyers will top up the price, or when a mob of sellers will trash it? If behavior were rational, then the potential for profits would be much reduced. It's like running with the bulls in Pamplona: it's hard to know just where those horns will be facing at any given time.

Buy low/sell high for sure... but real profits beat paper ones any day! I put my money where my mouth is: I've been selling stock holdings, and plan to shift much of it into an office building for my business. My business is the one I most wish to invest in.

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