After less than 5 months and a +59% gain, it is now time to recommend selling the principal of BIDU. Our use of Edson Gould’s Speed Resistance Lines indicates that BIDU could rise to $160, as seen in the chart below:
Although $160 appears to be on the horizon, and could nearly double the stock’s price from the $85 level it was recommended (found here), we see that the stock is struggling mightily to get beyond the $135-$140 level.
According to Charles H. Dow, co-founder and former editor of the Wall Street Journal, there is a concept of “seeking fair profits” by buying at good values and selling as market participants are just getting interested in a stock in the following July 20, 1901 Wall Street Journal commentary:
“The best way of reading the market is to read from the standpoint of values. The market is not like a balloon plunging hither and thither in the wind. As a whole, it represents a serious, well-considered effort on the part of farsighted and well-informed men to adjust prices to such values as exist or which are expected to exist in the not too remote future. The thought with great operators is not whether a price can be advanced, but whether the value of property which they propose to buy will lead investors and speculators six months hence to take stock at figures from ten to twenty points above present prices.
“In reading the market, therefore, the main point is to discover what a stock can be expected to be worth three months hence and then to see whether manipulators or investors are advancing the price of that stock toward those figures. It is often possible to read movements in the market very clearly in this way. To know values is to comprehend the meaning of movements in the market. (Source: Wall Street Journal. Review and Outlook. July 20, 1901)”
Our deconstruction of Dow's thoughts are as follows:
First, Charles Dow tells us that the stock prices of today are adjusted for what is expected in the future. The distinction between great operators [Buffett, Einhorn, Paulson, Berkowitz, Icahn etc.] and average traders/investors is the ability to know values enough to project at least six (6) months down the road that, even at higher prices, the investing public will still be willing to buy more of the stock in question.
Next, these great operators are supposed to be willing to accept half the gains that they expect for 6 months and in half the time. At which point, the great operators move on to other undervalued opportunities. Dow believed that not only should the great operators be able to predict the direction of the price of an undervalued asset, they must also accept less than the full amount possible despite their confidence and accuracy of prior investments using the same approach. Again, this idea is based on a concept called “seeking fair profits.”
We think that securing the gains that have been achieved in Baidu (BIDU) in such a short period of time are far better than the prospect of an additional +18.50%. If the principal is sold then an investor would still be able to benefit from any additional gains and there would be absolutely no loss.