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Reader Questions & Answers 1

In my previous post titled Confessions of a Value Investor I revealed to readers that I had sold out of my entire position in Norbord (NBD) after a difficult 24 month period holding this stock. Despite receiving consistent dividend payments from the company I had to suffer through a 40% loss as the stock continued to lag and provided me with a constant reminder of what lessons I had learnt from one of my first stock purchases.

As a follow up on that post I’ll respond to some comments submitted by Philbert who asked a series of questions on the stock and my reasoning for selling:

Philbert wrote:

I too hold NBD and have seen the exact same behaviour as yourself. I am curious why you sold. Do you feel that your money would work harder for you some where else? Or did you feel that the turnaround in this company would never come? Do you feel that the quality of Norbord has slipped (not withstanding the current rocky building environment)?

The first major reason that I sold the stock was to take advantage of the tax loss to adjust for some significant capital gains that I had generated so far this year. Since my Value Portfolio is a non-registered account it is subject to taxes from investment income, capital gains and dividends. By selling NBD now I decrease the tax burden on the portfolio for the 2008 year and take a big chunk of the capital gains generated out of the hands of government. I do have the option of buying back NBD after the 30-day superficial loss rule lapses, but I do admit that currently I believe I can find better opportunities for my investable capital elsewhere.

During the summer declines I had taken advantage of available margin in my IB account and the proceeds from the sale of NBD have been applied to that liability to bring it to nearly $0 again. A turnaround in the company in my opinion is achievable in the future. The question I posed to myself as an investor was when that might be (this year, next or 2010) and if I was willing to wait that long. Even if BAM.A decided to come in and take the company private the purchase price would have likely been well under my ACB of over $8 on NBD. The company has some solid long-term fundamentals, but they aren’t making money currently, paying their dividend through available cash reserves & debt and although they are likely to emerge as the low cost producer of OSB in their industry with high productivity capabilities I didn’t know how much more of my invested capital I would be willing to lose.

At some point any investor needs to have a buy and sell price in mind for a stock they’re researching. Normally I wouldn’t have let any stock slide as far as NBD did in my portfolio before I sold it, but as one of my first purchases it provided an important and powerful reminder each and every time I looked at my portfolio.

For the time being I will continue to hold this company because I believe the fundamentals are strong and when the dust settles (however long that takes) they will be one of the few left standing.

I feel that every investor after doing their own due diligence is entitled to maintain an investment in a company regardless of what the rest of the market or other investors think. When the dust settles I might find that I sold prematurely and lost out because I didn’t have enough patience. I think the management of the company is excellent and they have a strong backing of institutional ownership. I made some serious errors in my original analysis and having learnt from those I now feel I am a more experienced and cautious as an investor.

Additionally, in hindsight, would you have bought Norbord now or in the near future?

In retrospect it’s always difficult to evaluate what you would have done differently. There is always the possibility that I may purchase NBD again, but for the moment I put more value in the lessons I learnt from the experience than any monetary gain I could receive.

I follow Irwin Michael closely and noted that he recently close out his position in KEY… Do you continue to hold your position in KEYN? I happened to have sold my position in KEYN in July for a profit of 30% in 5 months and was quite interested to see that Irwin had sold his position.

One important lesson or rule that I apply to my Value Portfolio applies to a post I wrote recently titled 30% today vs. 50% tomorrow where I discussed my habit of selling out of an entire position in a company once I’ve hit a sell target in order to secure the gains I’ve made regardless of how strong I feel fundamentals of the company continue to be. While this might not be for all investors I continue to believe that it’s a prudent practice to consider because it helps an investor to avoid being greedy and stay rational in their stock selection process. You can always enter back into a position if it goes back down, but by not selling you’re not securing any gains for future purposes.

I sold out of KEYN at $14 in August when it hit my 12-month target price after holding an initial amount since December 2006. I had taken advantage earlier of adding to my original position in the winter when the stock plummeted to under $10 and secured my gains regardless of how I felt fundamentals continued to be for the company. Irwin Michael made some valid points of concern in his disclosure for selling the stock and more than one I share as well.

KEYN doesn’t pay a dividend and in this current environment there are other stocks that pose a better risk-reward ratio in my favour. My portfolio is already tech-heavy with a number of technology stocks and KEYN was clearly the least fundamentally strong over the long-term in this group. The company is economically sensitive to changes in the industry that its product/services operate within and expensive acquisitions have made me nervous. As the stock approached its previous valuation of $14 I sold out confident I had made an attractive gain and continue to have the stock on a watchlist I maintain for previously owned stocks.

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{ 2 comments… add one }
  • Philbert September 5, 2008, 10:46 am

    Thanks.

    It’s nice to see that I wasn’t offbase in selling KEYN (at least in the opinion of others that follow a value philosophy).

    I’m still holding out hope for NBD.

    I appreciate your post on 30% today vs. 50% tomorrow. I currently own only one mutual fund in my personal investments: Chou Associates and Chou has mentioned recently in his letters to investors about “round trips”. Stocks that have risen to 95 percent of what he deemed the fair value and then dropped back down again. In retrospect he feels that he should have sold. But really how could he know that would happen?

    Anyways, thanks for the post.

  • Brad September 5, 2008, 11:29 am

    It's difficult for any investor to predict where they feel a stock will go over any time period and Chou like many others will have difficulty doing so. By selling at a 30% gain you always run the risk of missing out on an even larger capital gain if the stock continues to rise, but if it tanks and you didn't sell then there goes your hard work.

    There are times when you hate selling a stock – take Russel Metals as an example. I recently sold it at $30 after a nice 36% gain plus dividends although I abolsutely LOVE the 6%+ yield and nothing fundamentally in my mind had changed. I just felt it was a prudent thing to do and may re-enter at another time as I use the proceeds to further diversify my DivG Portfolio. It could have gone much higher, but has since come back to under $27 and I would have easily lost a good chunk of money on it if I had held on. Now I'll wait for an attractive price to re-enter.

    It won't always work, but as an investor you have to protect yourself from risk & downside. Sometimes that means selling too early and at other times its just plain conservative investing.

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