Getting The Fill (aka buying on the way down)

One week ago, last friday morning, I wrote that I was waiting for the fill on three "good to fill" orders I had placed weeks before. They were:

$AMZN at $40
$GOOG at $320
$AAPL at $90

I got my fill on $GOOG earlier this week and mid-day yesterday I got filled on the $AAPL and $AMZN. I am pleased that I was able to buy stock in these three great companies at these prices.

Of course, when you buy on the way down, you have to be cool with watching the value of your stock go down. At the hedge fund annual meeting earlier this week I saw a hedge fund manager talk about buying bank debt at 80 cents on the dollar and then watch it go to 60 cents on the dollar. He has kept buying it as he thinks 80 cents is a bargain and 60 cents is a fire sale price. But when you play this game, you have to be able to take the 25% paper loss on that 80 cents trade.

I like to focus on my average cost on a given stock. And buying on the way down lowers your average cost. I have taken my average cost in $GOOG from over $400 to around $350 and if the good till filled orders I placed this morning get filled, I’ll take it to below $320.

I am using the exact same strategy with $AAPL and $AMZN. I like the fundamentals of these three companies, I am certain they’ll make it to the other size of this mess with those fundamentals intact, and when the market gives me the opportunity to buy the best businesses I understand well at 8-12x current cash flow, I think you have to take it.

As the prices go lower, I am increasing the size of my buys. I am not betting the farm on any of these investments, but if the market wants to give me $GOOG at 5x cash flow, I am going to put even more money behind that trade. That would be $160/sh by the way, and I don’t think its going anywhere near there.

What’s interesting to me is the analysts have now gotten bearish on $GOOG as Henry Blodget reported yesterday. That may be the final shoe to drop. Cynics always say that the analysts are the "last to know".

I believe that online advertising will be flat YOY in 2009 and that search will gain share and gain between 5% and 15% YOY. I think Google’s revenues will grow next year and I also think they’ll finally work on their cost structure.

So unlike the analysts, I am bullish on Google and getting more so as the price goes lower. Same with $AMZN and $AAPL. So I’m happy to finally get the fill and just placed some more orders at lower prices. Buying on the way down isn’t fun but you have to think like a buyer not a seller.

Reblog this post [with Zemanta]
#VC & Technology

Comments (Archived):

  1. SamJacobs

    I totally agree with you about the analysts. My employer doesn’t let us trade individual securities but I saw GOOG at 290 yesterday and was wishing I could buy. When Jim Cramer said GOOG was going to 750 it was time to short and when Henry Blodget says it’s going to 200 it’s time to buy. They are a reflection of market sentiment, not its predictor.

  2. Brian

    SCOR below $10 sounds like a bargain.Thoughts?

    1. fredwilson

      i own a ton of it and am very biased. yes, i think its cheap, very cheap. but it might be better to ask someone who doesn’t own as much as i do.

      1. Brian

        Thanks.I am also very biased having worked for the company and knowing Magid’s and Gian’s track record.

  3. steveplace

    I’m pretty sure there’s a study out there proving that analysts significantly lag the markets.Oh yeah, you could just sell puts as well to help reduce your average cost. But you knew that already.

  4. MassMan

    I totally agree as long as you have sufficient capital reserves and the patience and discipline to see it through.MassMan”The market can stay irrational longer than you can stay solvent.” – John Maynard Keynes

  5. Aruni S. Gunasegaram

    Well Google has been annoying me lately with their requirement to put everything through gmail. I avoided having a gmail account until last month and now everythnig I’ve used on Google (AdSense, Analytics, Adwords, Feedburner) is now requiring I use that gmail email address which I just set up because I had to in order to add someone to my Analytics account! But hey, I’m sure one of the mutual funds I own has invested in Google and as you said all of our funds our down but since we are on an asset builder plan, we are buying low right now!

  6. andyswan

    SELL PUTS!!! It’s extremely easy:1. Pick your “I’d like to buy there” price2. Go to the options chain in your broker and click on the chain that expires next calendar month (in this case, DEC)3. SELL TO OPEN the puts with a strike price closest to your price from #1 above (divide number of shares you want by 100 to determine how many puts to sell)On the third Sunday of the month, you will either have:1. Bought your stock at the price you wanted, PLUS kept the premium for the puts you sold (essentially lowering your buy price by TEN PERCENT in the case of $GOOGOR2. The stock isn’t below your buy price and you just keep the premium for the puts you sold (approx $30/share in the case of $GOOG $300 strikes)Make 10% profit or own the stock at a 10% discount to where you wanted it anyway.SWEEEEEEET!!!

    1. TMC2K

      EXACTLY!I wondering why Fred goes thru this explanation when he could be selling puts. For someone with deep pockets this is a good strategy. There’s another huge advantage to selling puts right now. Premiums are very high due to volatility. We are coming down from all time highs in volatility. As the market bottoms (a big assumption), volatility will go lower. You will make money as the value of the premiums erodes. It’s better to be on the sell side of options right now.Do what andyswan says. Sell some puts on these stocks, your strike price should be below yesterday’s low.Worst case scenario, you own goog or aapl below yesterday’s (11/13) close.

      1. Kevin

        Ditto — this kind of options ‘trading’ is way LESS risky than putting in a buy order at a lower price. Beating the dead horse, the volatility has the premiums so high, it’s a fantastic time to do this.I buy stock (almost) exclusively this way.

        1. fredwilson

          I hope my readers read these comments about selling puts in a bear market. It sure seems like a smart way to invest right now

  7. Michael F. Martin

    All true, but there are other good companies out there that can be had at prices less than half their annual revenue.

    1. fredwilson

      i don’t think revenue multiples are useful. the issue for me is what is the cash flow multiple.

  8. daryn

    I also got my share of fills this week; $AMZN @ 43 and $GOOG @ 299. I have a lot of faith in both companies, and comfortable with a long ride.On the other hand, I have several other stocks in consumer/retail companies (two that had particularly off weeks are $APP and $WFMI), and even at 30-50% discounts, I’m not sure I’m ready to buy in to lower my average cost quite yet..

    1. fredwilson

      You have to have serious conviction to be buying for a hold in this market

  9. Tony Choo

    i think this price isn’t lowest price. i like $AMZN .. i will continue wait & see

    1. Investor rules

      Investors can gain information about the brokerage services that a particular website has to offer by reading the quotes and the testimonials of the broker. It is important to note the experience of the broker and whether the broker has the adequate license of providing brokerage services.

  10. Avrom

    I have a proposal for a refinement of the cynics view you mentioned.Analysts as a group (of course there are exceptions) are indeed great at ‘predicting what just happened’. However, this is not helpful predicting how low things are going to go. Just because analysts are belatedly downgrading doesn’t mean it won’t go much lower, it just means they have already started going down.The most serious market shocks only happened in the last month or two and results already look bad – look at the retail sales in October…. The question is whether analysts are bearish enough right now.It will be truly amazing if Google is able to grow next year. Think about all of the companies who will be closing or massively slashing their marketing budgets. I would love to hear from Adwords users reading this blog to hear if they are increasing or decreasing their keywords bids or their daily budgets. It’s probably safe to assume that everyone is taking a very close look at how much customers are really worth and how they can reduce the cost of customer acquisition. Google may perform better on a relative basis but I would suggest that any revenue growth at all next year is probably VERY optimistic right now.What if the final shoe to drop is not when analysts turn negative (which is just a reflection that things are already bad) but when blogs like this give up trying to predict what is a good price to buy stocks at.