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Markets

The Second Time Around

Repurchasing a stock you know can have real benefits. For one thing, you understand the business.

I love buying exciting new stocks. But sometimes the best stocks to own are old stocks, former holdings you've sold off. It's a joy to buy Home Depot at $18 after selling it seven years ago at $36. Trust me, I know. I just did it.

But before we discuss the pros and cons of this nostalgic approach, let's address the elephant in the living room. (There have been so many elephants in my living room lately that I may soon have to move.)

Tricks with yourself. This elephant is your ego and the tricks it can play on investment decisions. I felt good buying Home Depot at 50% off the price at which I'd sold it, but it's not as if I could take that to the bank. Yet I felt richer, even mildly euphoric. Why? Because I thought I had gotten a bargain on a great item.

My ego told me I had done something smart, but who knows? The market will inform me eventually. In June 2000, you could have bought Yahoo at half price, for just $60, and now you'd be down 80%. Remember: The worst stocks in history always trade at tantalizingly low prices before they plunge to oblivion.

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But repurchasing a stock you know can have some real benefits. For one thing, you understand the business. You may know and trust the company's managers. You may be more aware than the average investor that an excellent company has been in the toilet for transitory reasons.

Speaking of toilets, let's revisit Home Depot. The housing blight has torpedoed the stock, and customer-service problems haven't helped. I don't know when Home Depot will recover, but I can imagine it earning $3 a share in 2013. Put a 15 multiple on that and you have a $45 stock, or a 150% gain. Will the company improve customer service? I hope so, but it is not an essential part of my investment thesis. Note: I also bought rival Lowe's, which has better growth opportunities and sharper customer service.

I also recently returned to Intrepid Potash, which produces fertilizer. I bought it in May at $43 soon after it went public, sold weeks later at $60, for a 40% profit, then watched it soar and then do a death dive. I bought Intrepid back at $18. Why? Because it may earn $5 a share next year. Because people in emerging markets have to keep eating. And, finally, because it had been bludgeoned as if it were a steel or copper stock and I believed that, in today's world, agriculture would prove less of a boom-and-bust business.

When doing this, however, beware of assuming that you know more than you do. Companies change, times change, and just because you sold General Motors at $50 doesn't make it a gem at $25 -- or, for that matter, at $5.

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Consider Sirva, a moving-and-logistics company. I knew the company and the chairman, so I bought the stock at the initial public offering in November 2003 and quickly booked a 20% profit. Soon the chairman bought some shares, so I bought again. Bingo, another profit.

Then the company began having trouble with California real estate (it owned homes it couldn't unload), and the stock plunged about 40% in a day. I bought in again and quickly sold at a 30% profit. Boy, could I play this stock.

Sirva started plummeting again and two admired value guys scooped up some shares. At $4.50, so did I.

Down and out. But I quickly felt as if I'd laid siege to Stalingrad. Every aspect of the business worsened. The moderate real estate problem turned malignant. The chairman left. I eventually sold at $2.86, a 21% loss on my last foray.

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Sirva promptly filed for bankruptcy reorganization. (It emerged from bankruptcy in May 2008 as a private company.) The moral: My closeness to the company blinded me to its fatal flaws. I thought my knowledge, such as it was, meant a lot more than it did. And I thought its new low, low price must be a bargain.

Hah!

Columnist Andrew Feinberg writes about the choices and challenges facing individual investors.