Thank you MVIS and DNDN for serendipitously setting a fine example for today’s post. As I type, they are both up about 20 cents. That’s a yawn and a whoopdie-do, both and neither. MVIS is up $0.20 from about $1.70. DNDN is up from about $37.40. So, 20 cents means about a 12% rise for MVIS and a 0.5% rise for DNDN. Which is more important? Neither, but investors’ emotional reactions to simple arithmetic can take over leaving logic behind. One thing is for sure. Positive is positive. Up is good.
Daily stock price fluctuations can be mesmerizing and engrossing. Traders need to watch them, surfing the rises and dips, sometimes profitably, sometimes not. Investors don’t have to watch prices bounce, though I confess that I do. Two things I do before breakfast are check for messages (email and Facebook) and check my stocks. I rarely expect to do anything with my portfolio, but I am fascinated by the spectator sport that is investing. I remember though that I spend less time at stocks than baseball fans spend checking their stats.
My investment style is based on investing in small companies that I expect will become large companies. I try to buy their stocks when they are cheap, which is usually because they are overlooked or too small to gain the attention of a Wall Street researcher. (see my book for details) When I check the morning stock prices, I am checking to see if something happened that will bring the company to the attention of the large financial houses. If there’s a pop or drop I look for a news item. If there’s no news, it might be stock manipulation, someone rebalancing their portfolio, or a mistake. Many people have bought SYY (Sysco) thinking they were buying CSCO (Cisco). If there is news, I check to see if it is fluff or substantial. I only think it is substantial if it specifies timelines, or finances, or legal commitments.
Toady’s move in MVIS seems to be tied to an announcement with Pioneer, the electronics firm. The two companies have a Memorandum of Understanding to develop HUDs, Head Up Displays, i.e. dashboards displayed on your windshield that will go for sale in 2012. MVIS is up 20%. I won’t turn it down, but I won’t pop the champagne either. A Memorandum of Understanding can sound significant, but it is more like getting engaged than getting married. A breakup can happen overnight without involving nearly as many legal entanglements. It will be good news if it really happens.
That’s the tricky part with little companies. Their early moves are large percentages but small price moves. Making 20% in an average year beats the average market. Making 20% in a day is even better, and can frequently be the beginning of many such days as an overlooked company and stock gets closer to its truer value.
Stocks don’t go straight up forever. It is an investing cliche and correct. As the stock becomes more valuable, the percentage rises tend to drop. A 20% rise adds about $20,000,000 to Microvision’s value. They have about 100,000,000 shares, so a rise of $0.20 per share or a 20% rise increases the market’s guess of the companies value by twenty million dollars. Dendreon was that small at one time. It is now worth about $5,400,000,000 and still only has about 100,000,000 shares. It’s $.20 rise increases it’s value by $20,000,000 too, but the percentage is much smaller, only about 0.5%. There’s no real news tied to DNDN’s move. It bounces around about that much every day.
Microvision’s news may not be stellar, but it is good. I am glad to see it. Dendreon’s news is non-existent, but I am glad to see DNDN’s move too. Twenty cents per share of any stock in my portfolio has a real impact regardless of the percentages involved. For every share I own, my portfolio’s value increases by twenty cents. That’s becomes a lot when multiplied by thousands of shares.
There’s a transition in long term investing in initially small companies. The daily percentage movements shrink as the company becomes worth more, but the total value of a pop due to real news tends to become much higher. At the start of DNDN’s rise (see my post from back then) there was a week when it was up ~185%. That was almost a $10 rise. Microvision probably won’t see that sort of dollar movement anytime soon, unless they sign a very publicly lucrative deal with Apple, but they could easily eclipse that percentage movement purely because their stock is so cheap and the company is so heavily discounted quantitatively and qualitatively. I’ll cheer any such movement, because the percentages make good stories, but it is the dollar value that actually affects my life.
Imagine that an investor makes $10,000 in a year because a stock goes up 100%. If the next year it “only” goes up 50% , the investor makes $10,000. The next year, 33%, $10,000. As the years go by and the stock only goes up by 1/2, 1/3, 1/4, 1/5, 1/6, etc., each year’s gain is still $10,000 but the eventual percentage is only 1%.
No stock follows that trend. They don’t always go up, and their yearly percentages don’t follow such mathematical precision.
Other trends are more likely. Most companies eventually fail or get absorbed, so it pays to watch for the time to sell. Companies can also succeed, and they may see low but steady and even boring growth for many years or decades. Then, despite small percentages, the frugal investor can see yearly increases that exceed their yearly expenses, which can build a portfolio upon itself in an effective compound interest (which can then be turned to marvelous philanthropy). It can look unreal in anticipation, but it can appear so simple in reflection. Here’s to eventually looking back on what started with the movement of a few cents.