Wednesday, December 15, 2004

Why I bought Canon (again)

I very nearly caught up on all the investment decisions I've made thus far, and I managed to not mention limit orders. All of my stock purchase and sales have been executed as limit orders, which means that I pick a price and my broker tries to get it for me. In contrast market orders are executed at whatever price the broker can find on the open market. Since I have a pretty good idea what I want to pay (or receive) for a stock, and since I live on the West Coast and don't get up early for the opening bell, limit orders work well for me. A further twist to limit orders is the Good-Until-Canceled order which let's me leave the order open for 30 day, until I cancel it, or the order is executed at my price. That way I can set a price, forget about my account for a month, and not miss opportunities.

The danger, of course, is missing out on a great stock because it never quite falls low enough or selling too late if the price never quite reaches my "reserve". In fact, I had money to spend almost all year, tried to buy Select Comfort, Pixar and Canon at various times, but couldn't because my limit orders never got executed. Finally, I ran against the deadline of making at least one trade a year, yet again. Canon seems way undervalued according to the intrinsic value calculations I've done. I guess it trades at something like a 30 to 50% discount. Considering Canon's impressive growth and ~1% dividend, I jumped at the chance to buy at $50.

Actually I started at $49, but when that price wasn't reached after a week or so, I tried $50. On November 30, Canon's day low was $50.01 so my order was not executed. I was tempted to try a market order the next day, but I resisted. Since Canon trades primarily on the Tokyo Stock Exchange, it's relatively easy to guess the next day's price in New York -- just convert the closing price in Tokyo from yen to dollars. On December 1, I found out that my broker had executed my order at $49.66, which was that day's low. Since the market price was less than my limit price, my patience paid off in a small way.

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