YOUR HOMEWORK: EBAY & YAHOO

Here's one from Ric. Read on:

Phil:

I must say that after reading your book twice I was very impressed and immediately began the process. I realize that Rule #1 works so well, because not many companies fit the specifications. A company must really do well to fit the model. 

I have begun the process and narrowed to three companies. One is almost ready for paper trading and the other two are (via my calculations) ready to go. I started trading on EBAY and YAHOO a few days ago and it looks like I'm losing money in both. Not a lot, but about a percentage point in both. What am I doing incorrectly?

Here's what I have. (Everything from MSN)  [Click on image to enlarge.]

Good numbers, but they have been very high over the early part of the past ten years.

Okay, question #1: are my numbers off like crazy or something? It says these two are WAY undervalued.

I'm not sure of how to post the charts of the tools but, I got in EBAY on 5/25 (Paper trading) when all tools told me to buy.  

I got in YAHOO (Paper trading) on 5/24. 

I'm not out of either but as of 6/2/2006 I am under in both. The following are the tables I use to track my investments:

EBAY:

YHOO:

To clarify a bit:

1.  I assumed a $10 trade fee. I do plan on using Scotttrade which will be only $7, but I needed an average number.
2. Money Out and Money In refer to the investment. I started with $1000 in each, took out my $10 trade and bought shares.
3. In the tools columns, b=buy, e=even, s=sell.
4. PNL (Profit and Loss) and the percentage of initial investment.

So Phil, what did I do wrong? I'm open to criticism as I'm completely a novice to this method.

Ric. H

My response:

Hi Ric,

You aren't doing a thing wrong except maybe trying to buy a business that is in a downward trend. 

Both YHOO and EBAY have been trending down all year, so it's very tough to buy into that trend and do well unless you just got lucky and caught the bottom. 

On the other hand, it sort of sucks to wait and wait and wait... and then buy in at the wrong time.  So if it's me, I just take my little lumps and know that it will change if I priced the business correctly and if in fact it is a wonderful business.

 

Let me add a couple of cautions: 

Before we start buying something for real, we have to really get to know the business, and that includes reading up on its history.  Ebay, for example, announced that they weren't going to be able to grow at some huge rate any more and the market has kind of taken that into consideration. 

Meg Whitman said roughly 20% was her number.  That puts Ebay at a lot lower sticker than you have it at.  See what a 20% growth rate with a 40 PE looks like.  I get $47. 

And you can see that others got the same number since it hit $45 and the big guys sold it off.  I'm sure it will have another run up toward the Sticker, but not immediately.

 

YHOO is another story entirely.  First they don't have the moat that Ebay has (near monopoly), and what moat they have is being breached big time by Google... and now Microsoft is climbing their walls. That makes their historical grow rate suspect and brings down the price. 

But more important is this: Can you really be sure that YHOO will even be around in 20 years? Is this the one business you would want to own for the next 100 years if your family's financial life depended on it?  Do you know the industry well enough to know that this business can grow at some predictable rate well into the future?

 

My guess is the answer to all those questions is "No".  So this one, best case, goes in the Risky Biz portfolio.  We know we're speculating and we take the ups with the downs.

 

Now, back to the losses. 

You've done well with the tools as far as I can tell.  On stage I usually go through a year of buying some business.  Lately I've been using EBAY.  In the last year if you follow the tools and use a 30 day MA, you would have bought it and sold it 9 times. 

Only three of those trades made money. The others were -2%, 0%, -4%, 0%, -3% and -3%. Yet the overall return for the 12 months is 50%.

The key is to first know the value is predictable and that you have a big MOS, and then to be okay with little losses and break-evens while you are waiting for the inevitable rise in price... and then BE THERE when it happens.

 

Now go play!

 

Phil