We’re always looking for the best places to put new money to work. Yesterday, we had a chance to double down on a technology stock that we’ve owned since March. Even back then, we bought it at a price 66% lower than it had been a year prior. We’d watched it during half that descent and were tempted to buy at prices that were 25% lower, 35% lower, and 45% lower than the high. We waited longer still and then finally bought at 66% lower than the high.
In retrospect, we were still too early. Yesterday, the stock fell through the level 75% below its high and 32% below our initial purchase. We, however, are in familiar territory here and rubbing our hands together with glee. Let me explain.
Two years ago, The Kelly Letter began building a position in a different technology company. It’s one of the biggest and you definitely know it by name. We began buying at $25, a price that was 29% below the high it reached ten months prior.
The stock fell further and we had a chance to buy it at $17, which was 32% below our initial buy price. Since that last purchase, the stock has risen 55%. We’re still holding on for more.
We do this all the time. We watch hundreds of stocks with solid business plans, reliable management, and other factors to indicate that they are good companies. What we wait for is something to depress the stock price. Many times — most of the time, in fact — the lower price is warranted and we steer clear. About 15% of the time, though, the market missed part of the story or the stock price is unduly depressed and we think we have an edge by buying the low prices.
Then, we build a position. Notice that we don’t need to get the bottom exactly correct. We strive to, and we want to, but even when we’re 32% early we can still do well if our initial thesis is correct. In the case of the stock we doubled down on yesterday, I’m as convinced that the thesis is correct as I was on the other stock I described, the one that’s now 55% higher than our last purchase.
If you think this approach is one that would appeal to your way of investing, why not give the letter a try? It’s only a penny to see what we’re doing for the next month. If you like it, stay. If not, cancel.
The worst that could happen is that you’ll have a chance to buy yesterday’s stock at a much better price than the letter paid, and to profit that much more on the eventual recovery. And make no mistake about it: this stock will recover.
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