The Prudent Investor

Thoughts On Selling, Part 2
May 17, 2007, 8:07 am
Filed under: Uncategorized

Last post I talked about how I do not believe in strict sell rules for positions as determined by the stock’s drop of a specific percentage. I do, however, take note and take action.

The most important thing in this situation is to understand the reasoning behind the drop in price. This has always been a problem for me with very small companies. For instance, one company I own is Ondine Biopharma (OBP.TO on the Toronto Exchange). This is an excellent company with a great product, but the company’s stock price can act like a roller coaster without any real significant new available. One reason for this could be the fluctuating currency exchange between the two companies, but a lot simply remains a mystery.

When a reason is found then one needs to decide whether or not the reason is worthy of a sale. Obvious reasons like a company having to restate its earnings due to accounting regularities, or a pharmaceutical company not getting a patent approved for an important drug kick me into sell mode. However, other reasons deserve careful consideration.

Since I am a long term investor, my questions go to the long term capabilities of the company. Will the problems affect the bottom line over the course of years? Is this something that can be corrected? Is this a one time happening or something that will occur over and over again? These questions lead to the most important question of all, “Is this a reason to sell or buy more?”

In the case of SJW Corp., as noted in a previous entry, the reason for the downturn was the weather, which is always going to be a major factor in a water utility. This is simply part of the cost of doing business, and for SJW Corp. this means that over the next few quarters they will not make as much as they would have if it had rained more. In my mind, this does not warrant a sell, and since the problem will show itself over the course of several quarters, there is no rush to take advantage of the lower price because I will be making regular purchases during the normal course of building the position.

So the course of action here is not to alter the course. I still see SJW Corp. as a strong company with a bright future, and this current downturn of price as an opportunity to continue building the position.


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