Amazon, Apple, Google: Buying on the Way Down

by: Fred Wilson November 14, 2008 | about stocks: AAPL / AMZN / GOOG    
Fred Wilson

Fred Wilson

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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:

Amazon (AMZN) at $40
Google (GOOG) at $320
Apple (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 side 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 I 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 it's 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.

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This article has 13 comments:

  •  
    Nov 14 11:56 AM
    Watching the market closer you could have filled GOOG under 300 and AAPL under 90...

    Not that I'd want either at this point...
    Reply | Link to Comment
  •  
    Nov 14 12:29 PM
    You are very brave - given how much this market is being manipulated by Paulson and the Plunge Protection Team. I'd stay clear of these markets until we see these characters gone.
    Reply | Link to Comment
  •  
    Nov 14 12:49 PM
    This young man is brave and also will be quite wealthy if he is not already. What he has described is a time proven method of accumulating shares. It is called "dollar cost averaging" and I have practiced it and seen it practiced for more years and stock market cycles than I care to admit to. No one buys at THE bottom. All you can hope to do is get close. This article was like reading an old cherished book again.
    Reply | Link to Comment
  •  
    Nov 14 01:25 PM
    When the SEC Reinstates the Uptick Rule. I will completely reinvest my capital. Until that time, your pockets are wide opened to be picked by the Hedge Funds devious trickery of Naked Shorting, Rumor Mongering and spreading Fear.
    Reply | Link to Comment
  •  
    Nov 14 03:04 PM
    I've been doing the same thing, averaging down. True, it's better for those of us with a bit more time on our side, but it's a better strategy than trying to time the market perfectly with one enormous buy at the bottom.

    And remember, if you wait too long, you can miss the opportunity. You can never know if it's THE bottom until after an extended rally. And the way things have been, I would not be surprised in the least if "the" rally we're all waiting for takes everyone by surprise and climbs at a record setting pace. If that happens, you can easily miss the boat on the bargains.
    Reply | Link to Comment
  •  
    Nov 14 04:56 PM
    isn't this also called "catching a falling knife"?
    Reply | Link to Comment
  •  
    Nov 14 05:41 PM
    It appears you are throwing good money after bad.Trying to catch a bottom is akin to winning a lottery..it just aint gonna happen. ALL of these stocks could drop another 30-50% before the carnage finally ends.
    Reply | Link to Comment
  •  
    Nov 15 09:50 AM
    Averaging in as one approaches a bottom is not a Bad Thing, not even an especially Risky Thing.

    But determining approximately WHEN a bottom is at hand is A Very Risky Business.

    Consider that IF this is truly the collapse of a global credit bubble, and not merely a housing bubble, that the bubble may still be inflating and has not yet exploded. Numbers of the amount Total Credit (government+corporate+... seem to show that it is still expanding, despite the gratuitous implosion of a lot of toxic debt and shrinkage of portions of the debt markets. Apparently, Ben Bernanke and other central bankers, intent on inflating our way out of deflation, have been creating credit at a sufficient rate to create a net expansion of the credit bubble. A pity that most of the credit they have created is being hoarded by those who got the bail-outs.

    Imagine if, just as the housing industry is approaching a bottom -- say, sometime in the summer of 2009 as various mortgage restructuring programs build up a head of steam -- and housing prices are within 10% of having bottomed, suppose that the credit bubble finally pops. The most likely sign of that at this point would be a cascading series of sovereign defaults, with the USofA somewhere along the chain.

    What do you think AAPL, GOOG and AMZN will be trading for at THAT point? And how long will poor Fred have to hang onto his purchases until they are breaking even? The only way Fred's scheme works is if we have a V-shaped recession, and if we are somewhere close to the inflection point. We could easily have neither of those things be true.

    Granted, this is a worst-case scenario. But a better way to attempt value-based investing is by following the tenets of Ben Graham, the way Warren Buffett has tried to do so over the years. That methodology is a MUCH better way to pick entry points for purchases during troubled times.
    Reply | Link to Comment
  •  
    Nov 15 12:00 PM
    Someonene who tries to pick the market bottom for a stock is guessing. So at some point if you like a stock, you have to pull the trigger.

    It seems most of the advice I've read over the years is it wait until an uptrend is established. Why is this better than buying on the way down?

    Answer: It isn't. The reason so many advisers want you to wait for an uptrend is because on the surface, it makes them look wiser. If you buy after an uptrend is well established, and the price continues up, they are smart and you are happy. Much later, at the high, they won't be telling you to sell, but after you loose all your gains, they can tell you you got greedy or didn't get hurt.

    In reality, this advice guarantees you to not participate in some % of the upswing from the bottom. When does the adviser suggest buying, when the stock is up 20%. or more? And don't forget, there are times when this 20% buy threshold is a bear market rally. Whoops.

    If you buy on the way down, you may also miss the bottom by 20% or even more. Or less. Or you may even hit the exact bottom if you're lucky. Or the world may come to an end so what difference does it make that you overpaid? One thing is certain: The uptrend buyers ALWAYS overpay.

    Do your Fundamental homework and buy good assets when they are cheap. So what if the next guy gets it cheaper? Market reversals can happen so fast you may miss much of the upside. Look what happened on 11/13. There was an almost 900 point upswing in the Dow after noon and before closing
    Reply | Link to Comment
  •  
    Nov 15 12:14 PM
    I wouldn't mention Henry Blodget if I was writing an article. He has ZERO credibility as one of the DotCom Shills for Merrill Lynch.
    From Wikipedia:
    "In 2002, then New York State Attorney General Eliot Spitzer, published Merrill Lynch e-mails in which Blodget allegedly gave assessments about stocks, which conflicted with what was publicly published.[5] In 2003, he was charged with civil securities fraud by the U.S. Securities and Exchange Commission.[6] He settled without admitting or denying the allegations and was subsequently banned from the securities industry for life. He paid a $2 million fine and $2 million disgorgement but kept millions more he earned in fees while promoting investments in stocks which failed.[7]"
    Reply | Link to Comment
  •  
    Nov 15 01:59 PM
    One should know whether you are an investor or a trader. This seems like an investor acting like a trader.
    Reply | Link to Comment
  •  
    Nov 16 01:21 AM
    Some are calling the recent tech downturn the worst since the dot com debacle. The prudent investor, I believe, would wait and see before following any stock down.
    Reply | Link to Comment
  •  
    Nov 19 09:22 AM
    How about getting paid to buy a stock cheaper by 30% from today after 4 months . Take a value stock with low debt like COP at 47 and sell 30 Put for April or May 2009 and get paid 2 dollars or so for a risked capital of 30 ;
    Reply | Link to Comment
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