Q: What does The Buyback Letter look for in a company?
A: Strong management, a good business plan, substantial buyback already occurring, and the likelihood of doubling our investment in 2-4 years.
Q: Don’t companies often announce buyback plans and then not follow through on them?
A: Yes. In fact, the announcement of a buyback plan can be a strategy used by a company to try to boost its stock price. The company presumes that investors will be impressed and will perceive that the buyback plan indicates some insider knowledge that the stock is currently undervalued. We track buyback announcements and The Buyback Letter only recommends companies that have already followed through and begun to repurchase shares, and that make it through our other filters.
Q: Aren’t companies better off reinvesting their profits back into the business and not buying back their own stock?
A: Each situation is different, but the companies we recommend are generating enough cash to both reinvest in their businesses and buy back their stock.
Q: Aren’t companies better off acquiring other businesses instead of buying back stock?
A: No! When companies make acquisitions away from their core businesses, they often squander billions in shareholder money. Some famous examples are AT&T’s acquisition of National Cash Register and Coca-Cola’s acquisition of Columbia Pictures. Both subsequently divested these ill-fated ventures.
Q: Is The Buyback Letter going to tell me when to get out of the market?
A: We are not market timers at The Buyback Letter. We have never seen a market-timing system that was reliable. In fact, it is during market declines that companies will repurchase the most stock and thus set the stage for the next growth spurt in their stock price. We believe that successful investing is a disciplined process, and through our calm, rational approach we can maximize our stock market returns.
Q: Does The Buyback Letter use stop loss orders?
A: On occasion. Our general thought is this: When you sell stock in a company that has an ongoing program to buy back its own shares, it may very well be the company itself that is on the other end of the transaction. They have more information than you do and, more often than not, will be on the winning side of the trade. We sell when the company buyback decreases to a certain point, or in some cases at stop-loss points. Investors know that price fluctuations along the way are expected. That said, as of Spring 2009, we instituted a trailing stop-loss that has helped us capture more of the potential gains. This discipline allows us to sell if any of our stop-loss sell signals are triggered, and to sell closer to a high.
Q: Do you always sell when a price target is hit?
A: Not always. If a company is still repurchasing its shares, we may continue to hold the stock. Often a company committed to share repurchases will finish one repurchase commitment and then announce an additional buyback plan. If the fundamentals are still in place that make that company a good value for us, we will continue to hold that stock. When considering whether or when to sell, we also weigh disappointing earnings or unexpected negative surprises, which allows us to get rid of stocks likely to be "dead money" or have further declines. Replacement stocks are selected using the same careful rules that we use for all stock selections.
Q: How often do you recommend stock buys and sells?
A: The short answer is, “As often as is necessary.” The longer answer is that it generally varies with each portfolio. For example, in the Health and Bio-Tech Index, there is anywhere from 60%-80% turnover each quarter. In the Buyback Dogs portfolio, there might be three trades a year. I make recommendations I believe will improve the rate of return, yet I am not changing simply for the sake of change. There is no reason to waste time buying or selling stocks if it is not likely to improve your return.
Q: Every few months, I have an amount of new money to invest. How should I invest my new money to do it in the most efficient way and minimize my fees? For example, if I have chosen two portfolios – the 20-stock Buyback Index, and the 5-Stock Health & Bio-Tech Portfolio, am I to divide up the amount of new money I have precisely evenly between each of the 25 stocks I own?
A: Our general answer is to invest new money so that you have, more or less, an equal dollar amount of all the stocks you hold. But let’s drill down deeper and get specific, so you can see how it might work. First, we presume you will be paying online commission rates, which range from about $5-$12 per trade. That’s pretty cost effective. However, if you are talking about putting $100 each into 25 stocks, at $12 a trade, then that becomes too high a percentage of fees for the net result; so you must certainly use your common sense about how many stocks to add to, relative to the fees generated. Next, take a look at the amount you have in each of your stocks. It is highly unlikely you would have the exact same amount of money in each stock (due to price fluctuations, splits or other such changes). So the introduction of new money is an opportunity to balance the amount you have in various stocks to achieve a more equal apportionment. Remember, your balancing act doesn’t have to be exact; pretty close is good enough! So, for example, if you find that you have five or six stocks of your 25 that are significantly below the rest of them, concentrate the flow of new money into those particular stocks to even them up with the rest.
Q: What if I don't like some of the stocks within your established portfolios?
A: We recommend that you buy all the stocks in a given model portfolio, and that you do not "cherry pick" by selecting only certain stocks. The portfolios were designed to work as a group of stocks, not as single stocks, and the success of each portfolio is built on that strategy. Cherry picking will expose you to unacceptable risk. Our theory is that a group of buyback stocks will outperform the market. We have not been able to accurately predict, with certainty, exactly which stock in any given portfolio will be the high flier. But together, they are designed to soar.
Q: What about the same stock being in two different portfolios? It doesn't make sense to buy it twice.
A: If you are buying two portfolios, and a certain stock is listed in each portfolio, please add the two proportions together when you make your purchase. You will then have more of that particular stock than you would of the others, since it reflects a position in both portfolios.
Q: If I select stocks I like from your recommendations, building my own selected portfolio, what's so bad about that? I will still get buy-sell-hold recommendations on those stocks in your Buyback Letter to take appropriate action, won't I?
A: Yes, you will always get the recommendations, and we have no way of knowing which of our subscribers bought which stocks in what quantity. But from year to year, like all investors, we are not sure exactly which stocks will outperform. If we knew that, we would have mythical investment powers! We do know that the Hulbert Financial Digest has consistently rated The Buyback Letter in the top 10 among all investment newsletters, both for overall returns and for risk-adjusted returns. We're definitely doing something right, and our strategy, which you subscribe to and which we also hope you follow, is this: choose several model portfolios that suit your personality and goals, buy all the stocks in those portfolios, generally modeling the percentage of your stock holdings by following our models. Then take our monthly advice on what to buy, sell and hold, and you will have gained the advantage of The Buyback Strategy. This will put you head and shoulders above the rest of the investing pack.
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