It seems to me that a lot of people that buy and sell stocks are a lot like the people that go to the racetrack.

When you are at the track you are investing — some call it betting — on a short-term result, which horse comes in first in the next few minutes. Of course you do your research. How did this jockey (the CEO) do in the past? How did the horse (the enterprise) perform recently?  How is the competition? What are the odds?

Now take a look at investors in the market. They too do their research. How has the CEO performed? How has the company performed? What is the competition? How reasonable is the price? And more often I’m seeing people that are either day trading like at the track, or taking profits as soon as there are some.

I’m not in that camp. I think the decision to buy should be based on anticipated long-term results — at least one year. And I think the decision to sell should be based on an analysis of the current facts irrespective of results so far. The question I ask is would I buy this stock today. If not, it’s better to sell and take the profits and put the proceeds into something I would like to buy today.  Even if there are profits to take, I would hold the position if it is still a stock I would buy today.

Apple, of course, is the prime example today. As a result of its spectacular rise a lot of people are sitting on nice profits. Many are taking the profits and some are investing the proceeds into Google, the next big darling of the market. But when you do the research, and look at the pricing, Apple seems much more appetizing than Google. One has a lower than market price-earnings ratio and the other is way out of range. One has a nice juicy dividend and the other just holds your money.

I noticed that in April the Motley Fool Blog Network listed Apple as one of the top three stocks to buy, along with Intel and Corning. Actually, for a small investor a portfolio with just those three stocks would be a good start. Intel is, after all, the leading manufacturer of semiconductors in the world, with 16 percent of that market. And from a valuation point of view it’s still cheap.  And Corning sells into the consumer electronics, telecommunications and life sciences industries, all of which are growing. Owning Corning is almost like owning a little fund.

Bank of America might be on the other side of the fence. It too has had a pretty spectacular rise, from around five to around 13, give or take a point. It’s way up there right now. I’m inclined to take those profits. Looking at the statistics on banks, while many of them look like a good investment right now, B of A does not look as good as others, so I would take my money and put it elsewhere.

For myself, I tend to be heavily influenced by sector analysis. The banking sector does look good right now because of an upswing in construction and business in general, which should lead to more borrowing and more deals in general. Cars are selling better than in a long time, so I like the auto industry. Dana Holding (DAN) and Delphi (DLPH) look especially good in that sector. Healthcare might be a big hit although no one knows what’s happening for sure. A little known company like Shire (SHPG) might be a good bet. And as you know from previous columns, I’m enamored with the idea of 3D printing. And I’ve read that the Xerox research center in Palo Alto is working on figuring out how to make the materials necessary for printing advanced electronic devices. That could be really big. This might enable a cell phone company to print a whole cell phone in one process, with no assembly necessary.

So, when my broker says “sell, this position has a lot of profit in it already,” what do I do? If I still like the company, as a compromise, I tell him to write a “no-cost collar” on it.  Here’s how that works: I buy a put about 10 percent below the current stock price. That gives me insurance against a decline in the stock price. I sell a call about 5 to 7 percent above the current stock price.  That gives up any profit above that option strike price. The premium from the call pays for the insurance put, so I pay nothing for this insurance. Then I’m protected against a decline, and still leave a little room for an increase before the stock is called away.  And if I want to protect against the whole portfolio I do the same thing on the S&P index.

As a closing note let me mention a recent table discussion I had with friends. I was talking about natural gas pipelines as a good investment (for a number of reasons which I’ve mentioned before). One friend had a horrified look on his face, and said that he would never invest in such a company as a matter of principle, no matter how good it was as an investment. From his point of view pipelines destroy the natural beauty of a number of areas in which they pass, frequently leak because of poor maintenance creating environmental problems, and foster fracking, which is an ecological disaster.

This might all be true. But my response was that the way to respond to these concerns is not to deprive yourself of profits. Just take some or all of the profits from the unsavory investment and donate it to groups that are fighting for your causes.

He thought about that for awhile, and lit up. He liked that idea. I wouldn’t be surprised if he buys tobacco stocks next.

 

 

For information about Merv Hecht and more details on the strategies and stocks he writes about in this column, visit his website at DoubleYourYield.com.

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