Green Bogleheads discussing Target Stock

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haloony
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Green Bogleheads discussing Target Stock

Post by haloony »

Hey All,

I am a newbie-boglehead and a lurker for several years. I got married this year and my wife recently read The Bogleheads' Guide to Investing and is getting a handle on understanding it all. Today, we got into a discussion about the aftermath of the Target credit scare debacle. Disclaimer: my wife and I are both 100% invested in target date funds. His Roth: VTTSX(Vanguard Target Retirement 2060 Inv) Her 401k: FDENX(Fidelity Freedom K 2055). We have no desire to change that allocation right now and our discussion is purely educational.

Background: Based off an article about the target breach (http://goo.gl/x1PS5D) the stock price of target has gone down and has been hovering at $60 since the breach

This is what she posed to me

“I’m  wondering if it would it make sense as an investor, to buy target stock now while its low and wait for all this to blow over, because eventually it will go back up and the key to stocks is buy low sell high-
but it’s hard to say you want to buy stock in target right now when there in such a bad way and lost so much loyalty-but it’s not like they won’t get past it - their Target they’re not going out of business. So do you think it would be a good idea to buy target stock now while its low and sell it when it goes back up after this crisis?”

My reply was as follows along with the rest of our discussion (She is person A, I am person B)

B: it sounds a lot like market timing

A: in a good or bad way?

B: I may be irrevocably biased at this point but all market timing is bad

A: ok but then what’s the point of the theory to buy low and sell high, bogle was supporting that

B: you are right - but taking a non-diversified bet is a gamble

A: like fireeye the security system that Target implemented, doubled their stock since the hack - there at $80 so bad idea to buy them now but I’m sure people are - when they should be buying target while its 
low because its destined to go back up

B: what I believe is that you should invest regularly every month and you will automatically buy more when the market is lower

A: the stock was trading at $70 around 6 months ago, it’s gonna recoil its "recess to the mean" thing

B: the mean reversion usually applies to the market as a whole not one sector and certainly not one stock. How would public companies ever go under then?

A: I know that but I’m saying given the fact that this whole scenario took place, it does make sense

B: but target might go down further, or it might recover

A: because had this not happened they were forecasted to do amazing for the Christmas holiday season and now they’re down over 40% in sales from last year

B: that's the thing with forecasting

A: but next year, when people realize they have to shop at target again eventually because it’s too convenient to pass up--- they’re sales might increase twofold (a raise from 2 years prior and from the 
year before when they were 40% down) which is when your stock that you bought low at 60 will go up to 70-75 and you sell high

B: yeah maybe but it could go down

A: it probably will in the beginning but they won’t be able to go lower than they did in the midst of a security breach

B: there's also the efficient market hypothesis - that the market price is very sensitive to the all the things you just said - and if it was really a cinch, the shares would be selling at a higher price, but it isn’t 

A: its recency bias- people might think it won’t do well because it’s not doing well now when in reality they’ll get past this downfall and go back to better sales
I think recency bias is the reason that it’s not efficient market hypothesis

B: like they're are probably many big time investors thinking this way so if there was money to gain, they took it. And there's none left

A: it has risen since the actual crash. The lowest it was, was 54, now it’s 60. idno I don’t totally agree with you I think this is what stocks are all about- If your gonna be blinded by companies that are doing well, your gonna buy fireeye @ 80 and it’s gonna go down when competitors in that industry pop up but if you’re not blinded, you should buy target while it’s suffering because the brand is ingrained in American culture and isn’t going away overnight

B: but I think you need to see that this is a speculation vs. an investment

A: of course it’s a speculation I see that -I’m not saying throw every dollar you want for retirement here

I’m going back to the thought that were very young so we can play around and be a little risky for a few 

years. And this sounds like an intelligent speculation not a guess out of thin air

But again- this is for learning purposes I’m not talking about us investing in target

----I think we have some gaps in our understanding. Looking for some more intelligent and experienced minds to fill it.

Thanks,
Hal
overst33r
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Re: Green Bogleheads discussing Target Stock

Post by overst33r »

I thought the same for BP and Ford in recent years. I just didn't have any fun money :greedy
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Taylor Larimore
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Considering an individual stock ?

Post by Taylor Larimore »

Hal:

Welcome to the Bogleheads Forum!

I hope you enjoyed our book. A couple, each owning a suitable target fund in a tax-advantaged account, can be a very smart thing to do.

You and your wife have a portfolio of about 90% stocks and about 10% bonds. That is usually considered a risky portfolio which could easily decline 50% or more in the next bad bear market (which will eventually arrive). Be sure you stay-the-course when it happens.

Now you are talking about an even more risky endeavor, investing in a single good-sounding individual stock :oops:

This is what others, more brilliant than I, say about that:
"Picking Individual stocks is like volleying with the Williams sisters." -- Bill Bernstein, author and adviser

"The notion that most average people and non-investment professionals can, with minimal effort, beat the best full-time, experienced money managers is, how should I say, ludicrous and absurd." -- Eric Tyson, author of Mutual Funds for Dummies.

"Attempting to build an investment program around a handful of individual securities is, for all but the most exceptional investors, a fool's errand." -- Jack Bogle
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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Re: Green Bogleheads discussing Target Stock

Post by nisiprius »

Well, there might be a couple of things worth mentioning.
haloony wrote:“I’m  wondering if it would it make sense as an investor, to buy target stock now while its low and wait for all this to blow over, because eventually it will go back up and the key to stocks is buy low sell high--but it’s hard to say you want to buy stock in target right now when there in such a bad way and lost so much loyalty-but it’s not like they won’t get past it - they're Target they’re not going out of business.
Stocks can go to zero. Big household-name companies do go out of business. It isn't even all that rare.

ImageImageImageImageImageImageImage

In retail:

Image
Image

If those names mean nothing to you, and quite likely they don't, let me assure you that to someone a few decades older, the idea that these companies would go out of business would have been just as unbelievable as it is to you to think of Target going out of business. But, as F. W. Schwinn (another name that probably doesn't mean anything to you if you're under maybe... 35?) "Business means trouble. The two words are inseparable. [You're not] out of trouble until you're out of business."

Now, I am not saying that the security breach will put Target under, nor that Target is likely to go under for any other reason. What I am saying, and I think this is the other obvious point--everyone else is thinking all the same things that you are thinking. "Priced in," "efficient market." Everyone knows that this might be a good buying opportunity and that the odds are that Target will come back. And everyone knows that it might not. And the price represents the compromise based on the consensus judgement of the odds.

Let's say the price of Target is 60, and that without the security breach it would have been 75. Well, if you believe the market has got it right, one way to look at it is to say that the market thinks there's a 20% chance that it will go to zero, and an 80% chance that it will go right back to 75. So you have a 20% chance of losing $60 and an 80% chance of making $15, and -60 * 20% + 15 * 80% = -12 + 12 = 0.

That is to say, you may be making the mistake of ignoring a small chance of a big loss, because it is small. You may be right that Target isn't going the way of Pan Am or Digital or Woolworth, but the point is that if you're right you make $15, but if you're wrong you lose $60. Big chance of making a little, small chance of losing a lot.

The other point--this is theory out of books and I'm always skeptical of everything and I may not have understood the books, but, nevertheless, this is something you need to think about. In theory, the efficient market rewards risk, but it only rewards risk that you need to take. It doesn't reward unnecessary risk. You can tell the market that you plan to sell your Target stock and then bet the proceeds on a horse, but it won't pay you any more knowing that you are going to gamble it.

Well, the theory is that the market does not reward risk that can be diversified away. So, investing in any single stock is a gamble that you do not have to take, and that other investors are not taking. In Larry Swedroe's words:
Owning individual stocks and sector funds is more akin to speculating, not investing. The market compensates investors for risks that cannot be diversified away, like the risk of investing in stocks versus bonds. Investors shouldn't expect compensation for diversifiable risk--the unique risks related to owning one stock or sector or country fund. Prudent investors only accept risk for which they will be compensated with higher expected returns.
Last edited by nisiprius on Thu Mar 13, 2014 5:41 pm, edited 11 times in total.
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Re: Green Bogleheads discussing Target Stock

Post by cheese_breath »

haloony wrote:.... their Target they’re not going out of business. ....
Really?

"They're Enron, they're not going out of business."
"They're Worldcom, they're not going out of business."
"They're General Motors, they're not going out of business."

Buy Target now and you might hit it big. On the other hand you might lose it all. Your call.
The surest way to know the future is when it becomes the past.
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Re: Green Bogleheads discussing Target Stock

Post by abuss368 »

The Bogleheads guide is an excellent book. I have a copy on my shelf and refer back to it as needed as a great source of information.

That said, most of my readings and understanding is the individual investor is typically not compensated for the risk of owning individual stocks.

I would stay the course and simply own a Vanguard Target Retirement fund.

Keep investing simple.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: Green Bogleheads discussing Target Stock

Post by LadyGeek »

I removed a few off-topic sexist remarks and their responses. As a reminder. see: Forum Policy
...avoid profanities, obscenities, lewd and otherwise offensive words and remarks
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Re: Green Bogleheads discussing Target Stock

Post by Calm Man »

I have a feeling your wife may be right. I don't buy individual stocks but am amazed when a year later you look at the stock price of a company with a disaster a year before that could happen to anybody, as often it has. Why not just let her buy some? She earns money.
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Re: Green Bogleheads discussing Target Stock

Post by ERMD »

to summarize the above points: what do you know about Target that the market didn't figure out yesterday? as far as investing goes, forget about it.

now, on the other hand, if you have a few sheqels that you're going to throw at the ponies or March Madness anyway, and you want to gamble on Target, go nuts. just recognize that it's gambling, not investing.
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Re: Green Bogleheads discussing Target Stock

Post by CABob »

Remember that anytime you buy an individual stock at what you think is a low price there is someone on the other side of that trade thinking they are selling at a high price.
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Re: Green Bogleheads discussing Target Stock

Post by abuss368 »

CABob wrote:Remember that anytime you buy an individual stock at what you think is a low price there is someone on the other side of that trade thinking they are selling at a high price.
Well said.
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Re: Green Bogleheads discussing Target Stock

Post by terrabiped »

ERMD wrote:to summarize the above points: what do you know about Target that the market didn't figure out yesterday?
My thoughts as well.
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Re: Green Bogleheads discussing Target Stock

Post by bottlecap »

Take a good look at Nisiprius' post.

Some day, Microsoft, Apple and WalMart will be out of business.

JT
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Re: Green Bogleheads discussing Target Stock

Post by KyleAAA »

I don't think Target is going out of business but I wouldn't invest in the stock, either. They compete in a brutal business so even had the breach thing not happened, it's not the kind of company I would choose to invest in.
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Re: Green Bogleheads discussing Target Stock

Post by meowcat »

haloony wrote:Hey All,
“I’m wondering if it would it make sense as an investor, to buy target stock now while its low and wait for all this to blow over, because eventually it will go back up and the key to stocks is buy low sell high-
Are you sure you/your Wife read the book? Did you learn nothing?
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Re: Green Bogleheads discussing Target Stock

Post by Valuethinker »

bottlecap wrote:Take a good look at Nisiprius' post.

Some day, Microsoft, Apple and WalMart will be out of business.

JT
Microsoft? Say it isn't so! The world's most widely used software.

Apple? Look how its customers love its products. There has never been a company in history that its customers are so identified with.

WalMart? The world's largest retailer?

;-). ;-).
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Re: Green Bogleheads discussing Target Stock

Post by Jack FFR1846 »

I worked for Digital and when it was tanking (was that in 87? I try to block it in my mind), I bought because "how could it possibly go lower than 90". I sold 3 years later at (I think) in the 20's.

I bought Poloroid because they had dropped dramatically and seemed to be rebounding. How could a blue chip company like that possibly be at $7. Not long afterwards, they declared bankrupsy but continued to trade. I sold at 8.8 cents a share. Scottrade somehow lost my check in the mail. It didn't matter, it wasn't even worth pursuing.

This is absolutely market timing. If you want to do something more sure, fly to Vegas and put all that money on red, then fly home.
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haloony
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Re: Green Bogleheads discussing Target Stock

Post by haloony »

Hey All,

Thanks for all the feedback! I think I need to reiterate that this was never a "should we do this?" question. It was more along the lines of that we have read a lot about the dangers of buying individual stock and we were trying to apply what we learned to this particular stock. In any case, this was quite helpful.

Thanks,
Hal
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Re: Green Bogleheads discussing Target Stock

Post by nisiprius »

Maybe Target can survive the security breach, but can they survive their "Photoshop fail" scandal?
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Re: Green Bogleheads discussing Target Stock

Post by LadyGeek »

^^^ Possibly, but discussion along those lines is off-topic.
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Re: Green Bogleheads discussing Target Stock

Post by nedsaid »

You have identified a couple of issues. First, the difficulties involved in stock picking. Second, how to determine what is value and what is trash.

Stock picking with good research and getting pretty good results is not horribly difficult. What is difficult is stock picking and outperforming the market averages over time. I own some individual stocks but it is pretty doubtful that I have experienced outperformance. You can do pretty good if you pick quality companies at good prices, diversify across industries, and exercise great patience. Even then, you will experience an investing disaster from time to time. I have had the stocks of "quality" companies like Lucent, Nortel, and AIG blow up. I sold Fannie Mae when it was doing really well and did so a few years before it blew up.

Another problem with stock picking if you are a value investor, is how do you tell the difference between a company with temporary problems and a company which has problems that can't be fixed. A good example was Kodak, I bought it years ago and later sold it. The film business was a declining business and Kodak had no edge in digital imaging. Heck, Hewlett Packard was selling digital cameras. This is the classic value trap. The company was cheap but for a good reason. Another company that I have owned for years is McDonald's. It had problems but in recent years the company turned itself around. The point is you don't always know if the problems will be fixed and you are taking a chance. It really is a bet on management.

If you want to stock pick, do it with a minimum of five stocks. The maximum is probably about 25 as that is the upper limit of what most investors can follow. The National Association of Investment Clubs had a good rule of thumb. Of every five carefully chosen stocks you pick: three will perform about as you expect, one will perform beyond your wildest expectations, and one will bomb. The NAIC taught small investors how to pick stocks but it was a lot of work and I am skeptical that one can outperform the markets. But it can be a lot of fun. It gives you a real appreciation for what portfolio managers do. You learn a lot about the market.

My advice would be to stick with your Vanguard investments. My suspicion is that Target will probably work itself out of its current problems. Most big companies run into issues like this during their history. It might be a good investment. Retailing is a particularly competitive business. A retailer does not have a "moat" around its business and customer tastes can change. A lot of retailers wound up as road kill.
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Re: Green Bogleheads discussing Target Stock

Post by Randolph »

Hal,

Others have already pointed out some of the shortcomings of investing in a particular stock. I would like to add one other factor that hasn't been presented (edit: actually after posting this, I see that nedsaid above makes the same point I wanted to make here).

Yes, you could buy Target at the current price. Now, let's suppose that the price is "irrational" in that investors recently became more scared of owning the company than the news warranted (that is, the bottom line won't be as affected as people think it will) and that eventually, people will calm down, their faith will be restored and the price will go back up. But, the fact of the matter is that no one knows what will happen to Target the company or "TGT" the stock. Even if the company improves, it doesn't mean that investors will be willing to pay more (or enough more) to make your investment worthwhile. It's also possible that Target could have many other unforeseen problems. NO ONE KNOWS.

The thing I would like to add, though, is that because you have the alternative of buying the whole market, if you choose instead to buy a single company, you are not only betting that owning the company will provide a reasonable return for you, but that it will provide a better return than owning the whole market (that is, "Target" will outperform "the market" over your holding period). If you buy Target now, perhaps it will (eventually) go up (say 14%). But perhaps the market will go up even more (say 16%). Yes, it's also possible that the market as a whole will go nowhere for two years while your investment in Target increases 30%. Again, NO ONE KNOWS.


All that said, it can be a helpful exercise to take a small part of your portfolio and invest in an individual stock just to see what happens. I have learned quite a bit in buying and following individual stocks. I am certainly not a pure follower of Bogle even though I basically believe that he is right about the most rational way to invest. I have some holdings that have dramatically outperformed the market, and other holdings that have lagged. I own a variety of index funds, too.

If you decide to buy Target and it does well, count yourself fortunate, but don't make the assumption that you are now an expert stock picker. All the evidence suggests that even experts who have vast knowledge of business and spend innumerable hours trying to pick the "right stocks" (the ones that will outperform the market over a particular holding period), generally do worse than owning the whole market. Take your profits (or losses) on Target and try again. Keep it a small part of your portfolio if you want to reduce company specific risk (recognizing that you are taking company specific risk by owning an individual stock which on average will not be sufficiently rewarded).

Good luck and keep learning. Investing is an almost endlessly fascinating topic.
Last edited by Randolph on Sat Mar 15, 2014 12:41 pm, edited 1 time in total.
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Re: Green Bogleheads discussing Target Stock

Post by Waba »

Instead of buying stock in a single company you should consider buying a Value tilted index. It contains a diversified portfolio of the Targets of the world and has historically rewarded investors with higher returns. [*] As it contains many companies with a relative low stock price, it averages out the tail risk of an individual company going out of business. This of course comes at the expense of the potential magnitude of the upside reward.

Bogleheads recognize that they are unlikely to pick individual stocks that consistently outperform the market, and for the same reasons one is unlikely to consistently pick individual value plays that outperform a Value index. It is more tempting to believe that you can but that is because the risk associated with it is so asymmetrical: there is a small chance that you lose a lot, but thats easy to forget when 4 times out of 5 you can realize a modest reward.

[*] But less so recently
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Re: Green Bogleheads discussing Target Stock

Post by frugaltype »

Jack FFR1846 wrote:I worked for Digital and when it was tanking (was that in 87? I try to block it in my mind), I bought because "how could it possibly go lower than 90". I sold 3 years later at (I think) in the 20's.
A fellow Deccie! I still miss DEC. I sold all my DEC stock to buy my house years earlier, but that was just luck. That was almost the best company ever to work for.
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Re: Green Bogleheads discussing Target Stock

Post by baw703916 »

Target Retirement: good investment strategy
Target stock: not so much
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Re: Green Bogleheads discussing Target Stock

Post by abuss368 »

baw703916 wrote:Target Retirement: good investment strategy
Target stock: not so much
Excellent way to sum it all up. This is good advice.
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Re: Green Bogleheads discussing Target Stock

Post by Caduceus »

I think if you are going to buy any individual stock that the way to approach it is not the way your wife has discussed. A stock that has fallen might still be expensive relative to its intrinsic value, and a stock that has risen might still be cheap relative to its intrinsic value. Buying based on dips or market declines is no better than technical analysis, where "analysts" try to look at historical price information and buy the stock. Instead of anchoring yourself to price movements, what you should do is first figure out a value for the stock (with a margin of safety), and then see if the market price is below or above that valuation.

What you want to do is dig deep into the financial statements, and ask yourself a few questions at different levels of analysis. At the industry level, how will Target fare in the coming years/decades with competitors like Walmart or Amazon? Retailing is a horribly competitive industry with brutally thin margins. How will Target maintain/grow its cash flow? If you decide that it's even possible to estimate future cash flows, you'd want to figure out what the appropriate discount rate. If you think an index fund is going to return at least 7%, surely you won't take on the additional risk of owning a concentrated position just for the same 7% return. Or perhaps you can study Target's liquidation value. Does it have real assets that are only carried at book value but which are worth much more? This is why a lot of financial ratios, like P/B ratios, don't really mean anything. The declared "book value" of Pfizer is quite different from the "book value" of Barnes and Noble.

All of this is only the beginning. If after a week of tearing apart its financial statements you feel you've got a good sense of what the stock is worth, maybe, (but just maybe) it would be a good idea to invest. Anything else is no different from speculation. My suggestion would be still to stick with a broad index fund. If you feel you have to do something, you could tinker at the edges without doing much damage. Most Bogleheads would probably have had to rebalance away from U.S. equities into other asset classes (emerging markets or developed Asia, etc.) in the last year or so.
Leeraar
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Re: Green Bogleheads discussing Target Stock

Post by Leeraar »

What do you know about Target that no one else does? Nothing.

Get yourself a notebook. I have one in which I write trivial things down. Try some shadow investing.

Write down the date, and the reasons you like Target stock. Guess how much you would like to invest, and the price. Where might you get the money? Be sure also to write down the investment or spending you will forgo to buy Target. Also write down the price of TSM. Come back in six months or a year and contemplate what has happened.

There are some Boglehead tenets that sound like empty slogans (Stay the course). You will be much better off to learn by understanding and asking questions (as you are) than to go through the school of hard knocks.

Many years ago (about 1986), I bought Silicon Graphics and Sun Microsystems. Sun did nothing so I sold it after a year. SGI went from $7 to $75. I sold it for $14 on its way down to almost nothing. Doubled my money in just a few years!

I was very fortunate to actually make some money while learning that I do not have the temperament for individual stocks.

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
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ERMD
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Re: Green Bogleheads discussing Target Stock

Post by ERMD »

Leeraar wrote: I was very fortunate to actually make some money while learning that I do not have the temperament for individual stocks.
there are two times in a man's life when he should not speculate: when he can't afford it, and when he can. -- mark twain
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Randolph
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Re: Green Bogleheads discussing Target Stock

Post by Randolph »

Re-reading your original post (and later post), I see that what you were asking was not whether investing in Target (at some particular price) is a good idea but rather:
"----I think we have some gaps in our understanding. Looking for some more intelligent and experienced minds to fill it."

In the spirit of that question, I will try to annotate your conversation with some (hopefully) helpful commentary. I will insert myself into your conversation as "C (leaving your wife as person A and you/Hal as person B), after which, I will add some additional conversation.
haloony wrote:I am a newbie-boglehead and a lurker for several years. I got married this year and my wife recently read The Bogleheads' Guide to Investing and is getting a handle on understanding it all. Today, we got into a discussion about the aftermath of the Target credit scare debacle. Disclaimer: my wife and I are both 100% invested in target date funds. His Roth: VTTSX(Vanguard Target Retirement 2060 Inv) Her 401k: FDENX(Fidelity Freedom K 2055). We have no desire to change that allocation right now and our discussion is purely educational.

Background: Based off an article about the target breach (http://goo.gl/x1PS5D) the stock price of target has gone down and has been hovering at $60 since the breach

This is what she posed to me

A:“I’m  wondering if it would it make sense as an investor, to buy target stock now while its low and wait for all this to blow over, because eventually it will go back up and the key to stocks is buy low sell high-
but it’s hard to say you want to buy stock in target right now when there in such a bad way and lost so much loyalty-but it’s not like they won’t get past it - their Target they’re not going out of business. So do you think it would be a good idea to buy target stock now while its low and sell it when it goes back up after this crisis?”


C: You are right in that it is difficult "to buy stock in Target right now when they are in such a bad way and lost so much loyalty". In fact, that is why the price dropped. When the crisis came to light, many people weren't comfortable owning it at the higher price, sellers were more eager than buyers and the new lower price reflects that. You are not necessarily right in thinking "eventually it will go back up". Better to say, "eventually it might go back up." Many things can happen to a company that will cause the price to go up or down. Indeed, if you follow stock prices regularly, you will see that prices go up and down even when nothing at all happens to a company. Right now, people are willing to pay $X per share, next year, next week, tomorrow, in ten minutes, people will be willing to trade it at $Y, which may be higher than $X or lower than $X.

Also, while it is true that Target is cheaper (i.e. price is lower) "now" than it was previously, it is not necessarily a "better value". So, while it could be "a good idea to buy Target stock now while it is low and sell it when it goes back up" it may not go back up after the crisis, or they may have another even worse crisis. No one knows what the future holds.

B: it sounds a lot like market timing

C: I would not call this "market timing". Market timing appears to refer to the process of reducing your exposure to equities (stocks) specifically when you think market prices on the whole are going to go down, and increasing your exposure when you think prices are going to rise.

A: in a good or bad way?

B: I may be irrevocably biased at this point but all market timing is bad

C: It isn't "bias" if the facts are on your side. Yes, many investors try and time the market (per my previous description). Studies have shown, however, that those who do so will, on average, perform worse than those who don't try and time the market. Yes, if you time the market, you will get it right some of the time, but not often enough to make up for the times (and degree) when you will get it wrong. Furthermore, the additional trading will cause you to incur other expenses aside from timing misses, in the form trading costs and bid/ask spread inefficiencies.

A: ok but then what’s the point of the theory to buy low and sell high, bogle was supporting that

C: I don't recall Bogle advocating investors to buy individual stocks at low prices and sell them at higher prices. The closest thing I can think of that would be consistent with is principles would be to rebalance between stocks and bonds to stay close to your investment needs and you may be rewarded with a rebalancing bonus (selling bonds when they are "higher" / buying "stocks" when they are lower and vice versa). But there are no guarantees that this will pay off.

B: you are right - but taking a non-diversified bet is a gamble

C: Let's call it a non-compensated risk. That is, you are taking additional risk for which you are not sufficiently compensated, statistically speaking.

A: like fireeye the security system that Target implemented, doubled their stock since the hack - there at $80 so bad idea to buy them now but I’m sure people are - when they should be buying target while its 
low because its destined to go back up

C: Nothing is "destined" to go back up. Certainly not to any particular price where you intend to sell.

B: what I believe is that you should invest regularly every month and you will automatically buy more when the market is lower

C: Investing regularly every month is a great idea. If you invest the same dollar amount into a particular investment in each period, you will necessarily be buying relatively more of it when prices are lower.

A: the stock was trading at $70 around 6 months ago, it’s gonna recoil its "recess to the mean" thing

B: the mean reversion usually applies to the market as a whole not one sector and certainly not one stock. How would public companies ever go under then?

C: Yes, mean reversion is usually applied to the market as a whole. The market and even sectors and even individual sectors will have price fluctuations around the mean. This is an artifact of mathematics, though, and not a causal relationship. Every finite series of numbers will have a mean, some values will be above and some below. Remember, the mean is just the average price to date. If prices go up, the mean itself will go up, if prices fall, the mean will fall, etc, there will be a new mean and some prices will be higher than that mean and some lower. Trying to take advantage of the fact that prices will change and be alternately lower or higher than their current average value is as difficult as market timing.


A: I know that but I’m saying given the fact that this whole scenario took place, it does make sense

B: but target might go down further, or it might recover

A: because had this not happened they were forecasted to do amazing for the Christmas holiday season and now they’re down over 40% in sales from last year

B: that's the thing with forecasting

C: Forecasting is extremely difficult. What are all the possible variables that affect Target's profitability? Do you have them right? Management, with all the facts at their disposal will often "miss" their own forecasts (even considering they may deliberately be taking a conservative or aggressive posture in forecasting), and there are many, many unpredictable things that will affect the performance of the company, and then there are so many different ways they might respond to those things giving rise to new unforeseen circumstances, etc.

A: but next year, when people realize they have to shop at target again eventually because it’s too convenient to pass up--- they’re sales might increase twofold (a raise from 2 years prior and from the 
year before when they were 40% down) which is when your stock that you bought low at 60 will go up to 70-75 and you sell high

C: Even if the sales do increase as you predict, it is not necessarily the case that investors will be willing to pay the price at which you would like to sell. Maybe they will only pay $64 when you would like to sell. Maybe they won't even offer $58.

B: yeah maybe but it could go down

A: it probably will in the beginning but they won’t be able to go lower than they did in the midst of a security breach

C: The number of times investors have thought "It's hard to see how the price can go any lower than $X" = N. The number of times a price has gone lower than $X is a number very close to N. Prices can always go lower, and they usually do.


B: there's also the efficient market hypothesis - that the market price is very sensitive to the all the things you just said - and if it was really a cinch, the shares would be selling at a higher price, but it isn’t 

C: Yes, the efficient market hypothesis suggests that the prices quickly reflect all available information.

A: its recency bias- people might think it won’t do well because it’s not doing well now when in reality they’ll get past this downfall and go back to better sales
I think recency bias is the reason that it’s not efficient market hypothesis

C: Recency bias is a matter of thinking that the future is more likely to be like the recent past (if things are bad, they will stay bad, if things are improving they will continue to improve, etc). I think what you are really thinking here, A, is that people have over-reacted to the problem. Investors are inherently irrational and they will "underpay" when there is a problem and "overpay" when things appear to be rosy.

B: like they're are probably many big time investors thinking this way so if there was money to gain, they took it. And there's none left

C: Big time investors don't get this "right" either. Take a look at the recent history of JCP.

A: it has risen since the actual crash. The lowest it was, was 54, now it’s 60. idno I don’t totally agree with you I think this is what stocks are all about- If your gonna be blinded by companies that are doing well, your gonna buy fireeye @ 80 and it’s gonna go down when competitors in that industry pop up but if you’re not blinded, you should buy target while it’s suffering because the brand is ingrained in American culture and isn’t going away overnight

B: but I think you need to see that this is a speculation vs. an investment

A: of course it’s a speculation I see that -I’m not saying throw every dollar you want for retirement here

C: Although some people like to say that investing in an individual company is "speculation" while investing in the market as a whole is an "investment", I'm not convinced those are the best terms to use. Let's call all of them investments, some of which may carry more risk than others. Let's leave "speculation" for true gambling on games of chance.

A:I’m going back to the thought that we're very young so we can play around and be a little risky for a few years. And this sounds like an intelligent speculation not a guess out of thin air

C: To me, it sounds like more like a guess out of thin air. Do you have any compelling reason to believe that there is a mismatch between the Price of Target and the Value you are getting? Do you know what the "odds" are that Target will be trading at various prices at some point in the future? Do you know what the "intrinsic" value of Target is? How much will they earn each year for the next 35 years? What other problems will they have to deal with? What are their competitors going to do that Target will need to react to?
On the whole, I think the two of you have it right. But there are some additional questions you could have asked (the hypothetical her and you A' and B'):

A': Ok, what's the worst that could happen if we bought some shares of Target?

B': We could lose the entire investment.

A': Let's put a stop loss on it, so we limit the downside.

B': If it's a good value at $60, shouldn't it be a better value if the price drops? And then we should be buying more rather than selling?

A': Right, but maybe the price is dropping because of more bad news and now the future looks considerably worse for the company.

B': Or maybe other people are just becoming more pessimistic about the future of Target. Or maybe they are just souring on equities for the moment. It's really difficult to know.

A': I see the problem. Another thing we should consider: Maybe Target is a "good deal". But maybe there are even better deals out there. I mean at 2 and some change, Radio Shack is practically on fire sale right now.

B': I think that's because they are just about burned out.

A': True, but if Radio Shack recovers, we could make a killing!

B': Or we could get killed.

A': So, we could invest in a particular company, and maybe it would turn out fine. And maybe it wouldn't be that great. And maybe it would be a disaster.

B': Right, and we shouldn't just consider it as a stand alone proposition. We should also think about where else we could invest the money. Is Target the best investment? You mentioned Radio Shack, too. There are thousands of companies we could invest in. Which stock investments will do well and which ones won't? Do we need to look through them all? How do we know that buying Target right now will do better than other stocks, or the US stock market as a whole?

A' This index things is starting to look a bit more appealing.

B': Yeah, there are no guarantees in life, and index funds can fall as well as rise. And maybe they will be down at a point when we would like to sell. But over the long run, investing part of your savings in equities has historically provided a reasonable return, especially considering the alternatives. Maybe that return will be lower than it has been historically over our investing lifetime, and maybe it will be higher. But diversifying at least guarantees that we will capture the aggregate return of equities, and not be subject to specific company risk. In return, we will be giving up the chance to strike it big, which probably isn't very likely anyway.

A': And this way, we don't need to worry about following the ins and outs of a specific company and waking up one morning to find the price dropped 60% because of a major unforeseen circumstance. Still, I like the idea of just seeing how this works out. Couldn't we take a small part of our portfolio and invest in a stock or two?

B': Sure, maybe it would be a useful exercise. And maybe it will turn out well, and maybe it won't but it won't likely have much impact on the bottom line. Hopefully we can learn something through the process. But I'm probably more worried about what will happen if this ends up performing spectacularly well than if it isn't so hot. Maybe then we'll think we have a great talent at recognizing "hidden" opportunity and abandon indexes just in time to see our portfolio blow up in our face.

A': Well then, let's write down an investment plan in which we agree to invest no more than a certain very low percentage in individual stocks, and then stick to the plan. Any excess returns we can take and do something fun with, or give it to charity.

B': Right, this is our financial future we are talking about, so let's make sure we invest wisely. We are truly fortunate that Mr. Bogle and others like him saw so clearly into the value of passive index investing and helped create products we could invest in that would help us achieve almost full market returns. He pointed out how important it is to keep expenses as low as possible and urged us to avoid doing things that would be detrimental to our financial interests.
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Don Christy
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Re: Green Bogleheads discussing Target Stock

Post by Don Christy »

One other point that I don't believe has been mentioned.

Let's say you buy Target stock and you were right (lucky) and make $ relative to the total market... I would argue that this outcome would be WORSE for your financial future than losing the entire Target investment quickly. If this bet pays off you may erroneously attribute your success to skill or insight or something that you will think repeatable. That would likely cost you much more over your investing lifetime than a quick loss.

Good luck!

Don
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ogd
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Re: Green Bogleheads discussing Target Stock

Post by ogd »

The case of BP is instructive, I think. During May-June 2010, it lost half its market cap. Has it recovered? Yes but the 50% performance gap vs the rest of the market persists until today:

Image
Basically, the market got it right within that first month.

I'm not saying Target will be as severe, but if they cut back and have to sell assets those assets will stop working for you, like BP's. The loss could be fundamental not just sentiment.

It may work, but I wouldn't presume I'm that much smarter than the market. "It's gone down a lot" is pretty basic stuff that everyone knows.
JustinR
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Re: Green Bogleheads discussing Target Stock

Post by JustinR »

You are not smarter than the market.

Target's future has already been priced into the current price by the market.
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cheese_breath
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Re: Green Bogleheads discussing Target Stock

Post by cheese_breath »

JustinR wrote:You are not smarter than the market.
Not only am I not smarter than the market, but I also discovered in my old age I never was as smart as I thought I was. :confused
The surest way to know the future is when it becomes the past.
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baw703916
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Re: Green Bogleheads discussing Target Stock

Post by baw703916 »

On the other hand, sometimes stocks that get badly beaten up (justifiably or otherwise) do recover. So maybe the thing to do is to buy a whole bunch of down and out stocks, in the hope that some will completely recover and that this will make up for the ones that never do.

You could even implement a passive approach to accomplish this.

Call it a "bargain index" maybe.

Or perhaps a "value index".

:)
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Leeraar
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Re: Green Bogleheads discussing Target Stock

Post by Leeraar »

baw703916 wrote:On the other hand, sometimes stocks that get badly beaten up (justifiably or otherwise) do recover. So maybe the thing to do is to buy a whole bunch of down and out stocks, in the hope that some will completely recover and that this will make up for the ones that never do.

You could even implement a passive approach to accomplish this.

Call it a "bargain index" maybe.

Or perhaps a "value index".

:)
Why not just call it "The Dogs of the Dow?"

L.
You can get what you want, or you can just get old. (Billy Joel, "Vienna")
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baw703916
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Re: Green Bogleheads discussing Target Stock

Post by baw703916 »

Leeraar wrote:Why not just call it "The Dogs of the Dow?"

L.
Actually the "Dogs of the Dow" was a value strategy--a poorly diversified one which excludes the vast majority of companies (Target would never be included for instance).

If you are really investing in deep value, as opposed to just financials and slow growing companies, you want more than 10 stocks. And it's not that often that deep value companies actually appear in the Dow--usually Dow stocks get removed very quickly once they hit serious turbulence.
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