I got the following email the other day asking about INFY, the subject of one of my old posts. Read on.
Hey Phil Town,
If you have a moment, I have a question about INFY. INFY met the 4M test, and recently had, what appeared to be, a strong signal from the tools. Stochastics signaled a buy on 2/21, MACD signaled a buy on 2/24 and MA signaled a buy on 2/24. Since my purchase on 2/28 at $72, it's fallen to $70 and already two of the three tools are signalling a sell. There has been no bad news according to MSN Money, and India is really being talked up in the media recently.
Basically I'm confused. Based on what you write in your book, the three tools should signal buys when the institutional buyers are too far in to turn back, and yet the price has dropped almost each day for the last week. I appreciate that the tools may be wrong some of the time, but is there any way to tell when they are? Why are they wrong sometimes?
Any help would be greatly appreciated.
Thanks!
Chris
Here's what I told him:
Dear Chris,
It is really important that you not use real money until you get the hang of using the tools in conjunction with your excellent homework on INFY. I haven't dug into INFY completely but it appears to be a wonderful business available at an attractive price. If you understand the industry, it's meaningful to you and you like the moat and the management, you're good to go... but only when the big guys are moving in.
The problem is that you've misread the signals badly, grasshopper. I assume you are using MSN Money because if you were on Investools you would see that the last time INFY had three greens was in November, 2005 with a price of $70. It shot up for 6 weeks then finally went sideways with two reds at $82 in January and it was time to get out. There haven't been three greens since... therefore you should have been waiting patiently while cheering the stock to go down like a brick instead of worrying that you are losing money.
My guess is that you haven't properly programmed the MSN Money tools. Review those posts and write me if you still have a problem. [Some readers got deep into the technicals in the comments under this post. Also helpful. And it's all detailed out in RULE #1 as well.]
That said, let's review how a business that is as apparently undervalued as INFY could go down. First, ANY business can lose 50% of its value at any time. All it takes is for the institutional guys who control the price of the stock to decide to sell. WHY they decide to sell can be logical or unfathomable. Most of the time these guys are pretty smart and get the price more or less right. But some of the time they just get scared and sell to protect themselves. In this case, the stock price has been hovering in a range for about 18 months. Maybe because the industry is under question, to wit: can the Indians continue to hire cheap smart people and keep growing at these outrageous rates? Good question and one you should have a strong and informed opinion about if you own this business. Still, even when you build in a lot lower growth rate, the price still looks good -- and thus hasn't dropped.
Bottom line, Chris, is that even if we've got the price wrong, even if the analysts are wrong, even if something is happening to INFY that we don't know about, the arrows will protect you (because at this price nothing is likely to happen suddenly)... but only if you use them correctly!
Now go play!
Phil
