Monday, April 25, 2011

Research In Motion

Who Is Right?
It seems Research In Motion (RIM - TSX) is in all of the Canadian media these days.  With the release of its new Playbook tablet, there is no end of debate as to the future of this company.  It seems there are strong arguments to be made both for and against owning stocks in this company.  In fact, there seem to be as many opinions as there are analysts who follow this company, and there are over 50 who do.  Despite all of those opinions, sentiment seems to be split pretty much down the middle, for and against.  Does that mean investors should just let the dust settle before deciding whether or not to own shares in RIM?

Fundamental, or Technical Analysis?
I am not a professional, so, as I keep saying, I cannot advise people as to which companies they should own, or not.  However, I think this would be an excellent opportunity for me to reveal the process I follow when evaluating a stock for my own portfolio.  Some people prefer to rely on fundamental analysis, where the company financials are dissected and numbers crunched.  Others prefer a technical approach, instead, analyzing charts of price patterns. 

Why Not Both?
Personally, I have never understood why it has to be one, or the other.  Why would anyone try to do their best work by, first, tying one hand behind their back?  I understand why some people prefer one method over the other, but something I learned a long time ago was to solve a problem using one approach, then check the result using a different approach.  This can create a situation which reinforces the old proverb that a person with a watch knows what time it is, while a person with many watches can never be sure.  In other words, what to do if the fundamentals and the technicals do not agree?  My advice is the same as any situation when there is too much uncertainty - don't buy!

What To Buy and When To Buy
In fact, I use both approaches because I am actually trying to determine the answer to two different questions.  The first question is what should I buy, and the second question is when should I buy?  I do not simply buy stocks in fundamentally good companies and wait for something to happen.  I use the price charts to determine whether the stock is in an up trend, or not.  I don't believe in purchasing a stock where the share price is losing money, because my first priority is preserving capital.  Neither do I like to have money sitting in stocks that are not performing.  There is an opportunity cost to tying up money that could otherwise be earning a return.

When To Sell
Buying a stock with a price that is in an up trend is fine, but how do we know how long to hold it?  We can simply hold the stock until the trend breaks, but there is a chance of leaving money on the table.  Stocks rarely rise in a perfectly uniform trend line.  The purpose of having a price target is to increase my probability of selling at the best time.

Next Time
Next time I will describe the process I use to determine my price target.  Whether the analysis is fundamental, or technical, the principle is to buy stocks when the price is low and to sell them when the price is higher.

Do you have a preferred process in determining what stocks to add to your portfolio?  Do you have a sell strategy?

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