My Investment Journey

[KnowThePast]

Just a week in, and I am already breaking a rule about once a month investing.

A good opportunity is knocking on the door, and I felt that I need to act quicker, rather than wait for next month.

Therefore, I bought 4000 shares of SDI @ 0.50.

How's this for value:
PE: 29.70
ROC: 5

I guess this needs an explanation. PE is based on last years earnings of 1.7/share. This year, as at half year report, management expects earnings between 4-5/share, which would make the PE roughly 10.

The company manufactures its products in Australia and sells them overseas, so they've been hurt badly by the Australian dollar rise over the last few years. Their revenues appear quite flat over the last few years, but taking AUD rise out of the equation, they've almost doubled.

But wait, there's more. While Australia dollar has risen spectacularly, it is nothing compared to what has happened to silver price, which is their main cost of goods expense. Silver price has gone from $9/oz in 2009 to over $40/oz in 2012.

Few companies would be able to weather a storm on two fronts like that, but SDI remained profitable, although a lot less so than previously.

Now the fun bit, everyone knows that AUD is taking a beating, more importantly, Silver has now fallen to $21.74/oz, mainly in the last 4-6 months. There's been no announcement from the company on this front, but my guess would be that this is good thing. It may even improve their earnings.

Safety of capital is very important to me, and I do not like to speculate on short term movement. So what am I getting for this money, should be silver/AUD gamble does not work out:

- company with proven profitability over many years in the most difficult of times.
- original founder still in place and owns almost half the shares.
- Low debt.
- variety of products and markets for diversification.
- some of the manufacturing facilities are being offshored at the moment, which should further reduce costs, although I suspect this may cause some pain at first.
- profit was reduced by $2.2m due to losses in Brazilian operations. Things seem to be improving there, even without the recent help of silver price. Stopping the bleeding there will help a lot.

At the current market capital of $58m, I am getting a company that is earning $5m/year with plenty of potential for more, and $25m NTA. Works for me.



Current status:
Code Qty Buy Current Profit
CAB 500 4.03 3.82 -$105
SDI 4000 0.5 0.5 $0
Total -$105

Brokerage: $63.80.

Total invested: $4078.80.
Total P/L: -$168.80.
: -4.14%
XAO: : -0.97%

 

[KnowThePast]

A monthly update:

 

[skc]

A monthly update:

View attachment 53089

British Pounds?

 

[KnowThePast]

British Pounds?

Yes should be AUD, of course. Well spotted skc.

I am in UK at the moment and Excel formatted it in GBP automatically. My brain, being used to seeing the pound for 3 years didn't think anything of it.

Will correct it for the next update.

 

[Sir Osisofliver]

Hi KTP - I thought I might see if I can help you by providing some commentary and by asking a few questions. These questions aren't because I want to know, just that I want to see if you know and the level of rigor in your investment plan.

Here we go.....

Basic rules:
1. Don't lose money.
2. I have up to $50,000 to invest.
3. No leverage.
4. I will make one $2,000 investment a month.
5. Rule number 3 will be broken if there is a special opportunity, or if there's none with sufficient margin of error.
6. No more than 20% of portfolio into a single stock, but I won't necessary sell down what I already own.

1. You are going to fail at number 1 at some point in your investing journey. We all have and do lose money occasionally, but the most important thing is how you react to this event. This is after all what financial risk is - an outcome that is different from the expected outcome. I've yet to meet anyone who has ever achieved a 100% win/loss ratio, or who had everything they expect happen exactly right.

3. At it's core leverage is using other people's money to make money...if you have the skill and a system or methodology that gives you a positive expectancy. Appropriate use of leverage allows you to create a significantly faster compounding equity curve and it has methods that allow you to manage the risks involved. May I ask why this rule is in place? (IE Do you understand the difference between a debt and a liability?)

5. I define my investing methods into Hard rules and Soft rules. Hard rules cannot be broken, soft rules have flexibility. For me I have criteria so ensure that my decision to vary a soft rule is detailed...and then the outcome is evaluated. I cannot state the importance of evaluation enough. Without evaluation we do not learn from our mistakes. Do you have a clear understanding about what your rules are and the circumstances in which you will treat them as guidelines? How do you intend to evaluate your investment decisions?

When will I sell? Standard criteria:
1. When I made a mistake.
2. When circumstances changed.
3. When there's a better investment.
4. In some special cases, when performance objective was complete. Will mainly apply to less than stellar companies trading below NTA.

I agree with SKC that you need to identify a methodology for a Hard exit rule - despite the difficulties of doing so in a methodology geared towards fundamental analysis. What FA ratio's do you employ in your selection criteria? Perhaps you could look at some of the cash flow ratio's for a hard exit trigger, but even this will potentially mean that you suffer significant time delay between review periods.

1. How do you know you've made a mistake?
2. Which circumstances need to change before you exit?
3. Have you considered the taxation and Cost base implications of churning your funds?


That's all for now - nice to see a thoughtful process at work. Will read the thread with interest.

Cheers
Sir O

 

[KnowThePast]

Bought LYL 500 @ 4.31
As with other posts, I will mainly describe my reasons for buying this company at this point in time, rather than a general overview of the company’s business.

I do not agree with the current gloomy outlook for the resource sector.
Regardless of what happens in the next few years, demand for resources will grow over the long term. That said, no doubt that due to cautiousness, and difficulties in obtaining funding, there will be fewer projects available and the next couple of years may be rough.
So, what would one look for to buy in this environment? I would look for something that:
1. Has a very strong financial position, few years of lower activity should not place the business at risk.
2. Low capital requirements, or the ability to easily scale down the business to reflect lower demand.
3. Has good reputation, and is therefore more likely to increase market share during difficult times while less efficient competitors may go out of business.
4. Trades at a sufficient discount to allow for a few difficult years.

Which brings me to LYL.
1. No debt, $30m cash.
2. Low capital requirements, scaling up/down should not be a problem.
3. It is sad in some ways, but in Engineering/Construction/IT, phrases such as "delivered to client ahead of time and budget" is such a rarity, that it catches the eye immediately.
As for the price, I looked at it this way. What if there were no concern for the outlook of the sector, what would this company be worth? Looking at financials, it was growth very quickly, both revenue and profit and would therefore deserve a PE which is well above average. Buying it at a PE of 7.5 now is the price I pay for having to wait 3-5 years (although I don't think it will take that long for the sector to turn around).

Concerns/risks/other:
- Being a small company, it is more reliant on a few large projects, so a single client loss may have a big effect.
- For this company, I would have preferred for directors to have lower salaries. Their large share holdings and big cash reserves give me hope that good dividends will be paid even in difficult times.
- If times truly will be difficult in the next few years, there’ll be plenty more bad news, and share price could well go lower, even with no changes in this particular business.
- Founders leaving or selling most of their holdings would be a bad warning sign for me.

At the current price, it is acceptable to me for the profits to half and growth to resume in full after 3-5 years. Until then, I will have to weather the storm, I suspect.

 

[KnowThePast]

Thanks Sir O for the thought provoking post. I've also just read your thread with great interest. Thank you for making me waste half a day.

Hi KTP - I thought I might see if I can help you by providing some commentary and by asking a few questions. These questions aren't because I want to know, just that I want to see if you know and the level of rigor in your investment plan.

Here we go.....



1. You are going to fail at number 1 at some point in your investing journey. We all have and do lose money occasionally, but the most important thing is how you react to this event. This is after all what financial risk is - an outcome that is different from the expected outcome. I've yet to meet anyone who has ever achieved a 100% win/loss ratio, or who had everything they expect happen exactly right.

My rule about not losing money has copped some criticism and rightly so. It is not really a rule but an investment "philosophy". It was meant to be a rule about sticking to safer stocks as much as possible, but I couldn't think of any hard measure to stick to.

In general, I think it is relatively easy to pick a "good" company with a somewhat high degree of accuracy, even easier to pick a bad one. Based on this philosophy, I spend most of my time thinking about potential risks and certainty of an investment (as much as it is possible).

There's some great companies that I would love to buy, but risk aversion means that won't in many cases. For instance, the price might be sky high, or the debt too high, or the founders left the business recently, etc. In most cases, these examples will not be a concern (for a good company), but not often enough for my risk tolerance.

3. At it's core leverage is using other people's money to make money...if you have the skill and a system or methodology that gives you a positive expectancy. Appropriate use of leverage allows you to create a significantly faster compounding equity curve and it has methods that allow you to manage the risks involved. May I ask why this rule is in place? (IE Do you understand the difference between a debt and a liability?)

I fully agree. But I do not yet have enough confidence in my skill. I will certainly revisit this rule at some point in the future.

5. I define my investing methods into Hard rules and Soft rules. Hard rules cannot be broken, soft rules have flexibility. For me I have criteria so ensure that my decision to vary a soft rule is detailed...and then the outcome is evaluated. I cannot state the importance of evaluation enough. Without evaluation we do not learn from our mistakes. Do you have a clear understanding about what your rules are and the circumstances in which you will treat them as guidelines? How do you intend to evaluate your investment decisions?

I evaluate all my purchases on a regular basis. Even more important, I think, is to evaluate many others that you haven't bought.

With most stocks that I start to research, I know that I wouldn't be interested within the first 5 minutes. However, I do still enter all the data into my system, take notes, make projections and valuations. It's not as deep of analysis as the stocks that I do buy.

This has been extremely educational for me and I plan to continue doing this for as long as I invest.

In addition to testing my analysis/conclusions ability, it also allows me to get all the data into my software, including some manual adjustments and intangible measures, which than gives me the ability to do some back testing of my researched stocks.

I agree with SKC that you need to identify a methodology for a Hard exit rule - despite the difficulties of doing so in a methodology geared towards fundamental analysis. What FA ratio's do you employ in your selection criteria? Perhaps you could look at some of the cash flow ratio's for a hard exit trigger, but even this will potentially mean that you suffer significant time delay between review periods.

1. How do you know you've made a mistake?
2. Which circumstances need to change before you exit?
3. Have you considered the taxation and Cost base implications of churning your funds?
Sir O

To get the easy things out of the way:
1. Yes, I do consider taxation. I do not have any strategy, it is an individual stock decision that is considered at that point in time. I can't imagine I will ever make an stock buy/sell based on tax alone.
2. What FA ratios do I employ? None, really. I try to be as thorough as possible to analyze a company as a potential owner. Lots of ratios help me with that, but I don't use any one of them as a trigger. I use different valuations depending on the situation. Usually, a kind of DCF or even a simple earnings multiple.
I fully agree with the fact that cash flow is what matters; I also find that in majority of cases (especially with "good" companies), difference between cash flow and reported profit is minimal. I always check it, but usually than just use EPS, as the difference is not worth bothering about.

The difficult question is about having a hard sell trigger. As I said in my previous posts, I fully agree with the concept, but can't think of anything that makes sense. In the majority of cases, any hard sell criteria will be linked to a decrease in share price. Most ratios will be linked/related to earnings. And earnings will be linked to share price. Not always, of course, but usually. So, a hard sell criteria = a stop loss order.

Lots of FA reasons of why not to sell on a falling share price. Main one for me is that share price falls after something has happened. By the time I check the price (which I don't do often), the value has already been destroyed. At that point, I need to ask myself, is it the business that has changes, or is it a temporary setback? If the business is still the same (long term), this would be the worst possible time to sell. Bad news, depressed share price, etc. From FA point of view, depressed (temporary) earnings for a good long term business is the best time to buy, not sell.

Having a hard sell when the underlying business changes would be much nicer, but I can't think of any hard criteria for it. The only one that comes close is the resignation of founding directors. That would be a sell criteria in many cases for me, but not always.

With all that said, I still really like the idea of a hard sell exit. Could someone give me an example of what I would use, let's say, on a random portfolio of CAB, SDI, and LYL? Which ratios/triggers should I use?

That's all for now - nice to see a thoughtful process at work. Will read the thread with interest.

Cheers
Sir O

Thanks Sir O, would love for you to continue to contribute to my thread.

 

[skc]

The difficult question is about having a hard sell trigger. As I said in my previous posts, I fully agree with the concept, but can't think of anything that makes sense. In the majority of cases, any hard sell criteria will be linked to a decrease in share price. Most ratios will be linked/related to earnings. And earnings will be linked to share price. Not always, of course, but usually. So, a hard sell criteria = a stop loss order.

Lots of FA reasons of why not to sell on a falling share price. Main one for me is that share price falls after something has happened. By the time I check the price (which I don't do often), the value has already been destroyed. At that point, I need to ask myself, is it the business that has changes, or is it a temporary setback? If the business is still the same (long term), this would be the worst possible time to sell. Bad news, depressed share price, etc. From FA point of view, depressed (temporary) earnings for a good long term business is the best time to buy, not sell.

So what criteria would you use to identify if the business has changed? Or you plan to make it up after if happens? Fair enough for an investor not to use a price-based stop loss... but you must have an event based stop loss. If you don't sell when price falls, and you don't sell when earnings falls... when the heck do you sell?

Yes when the share price falls after bad news, chances are the share price has moved lower than what your "value" would suggest - but this is the exact scenario where "investors" follow their stock to the graveyard. After the first profit downgrade in Billabong, you could have sold at 20x higher than recent share prices. At the time the stock was cheap if you look at the company's forecast EPS to then preveiling share price... but what you end up realising is that the share price usually leads the company's performance down. The share was always "cheap" relative to the last profit guidance... and 6 profit warnings later BBG shareholders are down ~90%. BLY is another good example.

Sometimes, in order to prevent a 90% loss, you take a 25% loss. Every now and then you'd take a false positive (or is it false negative) and sold on a temporary earning dip. But it happens and you move on. There will always be other opportunities to deploy your capital.

Having a hard sell when the underlying business changes would be much nicer, but I can't think of any hard criteria for it. The only one that comes close is the resignation of founding directors. That would be a sell criteria in many cases for me, but not always.

With all that said, I still really like the idea of a hard sell exit. Could someone give me an example of what I would use, let's say, on a random portfolio of CAB, SDI, and LYL? Which ratios/triggers should I use?

The simplest and most rational hard sell criteria is one that's based on your investment thesis being invalidated. If your investment in CAB is based on CAB making 10cps and growing every year, you exit when the earning stop growing regardless of how price has been savaged on such news. If your criteria is that CAB makes 10cps and growing over a 2 year period, you then wait for 2 years worth of report.

Not using a hard sell because it's too hard to think of one is not a very good excuse, nor very good risk management.

 

[Sir Osisofliver]

Thanks Sir O for the thought provoking post. I've also just read your thread with great interest. Thank you for making me waste half a day.

It's not a waste if you learnt something.

My rule about not losing money has copped some criticism and rightly so. It is not really a rule but an investment "philosophy". It was meant to be a rule about sticking to safer stocks as much as possible, but I couldn't think of any hard measure to stick to.

Define "safe" - you are of course talking about risk, so how you decide that a stock is "risky"? Do you know how Asset Managers attempt to compare a stock's correlation to the broader market to assign a value to risk?

In general, I think it is relatively easy to pick a "good" company with a somewhat high degree of accuracy, even easier to pick a bad one. Based on this philosophy, I spend most of my time thinking about potential risks and certainty of an investment (as much as it is possible).

But financial risk is not about predictable scenario's, but unpredictable scenario's, IE the difference between the actual versus our expected return. If I back-test a system against a set of data, and it runs perfectly accurately for 11 and a half months, but currency moves down, causing International investors to pull out of Australia rapidly against a background of end of financial year profit taking and Kevin Rudd gaining control of the Labor Party all in the last two weeks which impacts my performance...that is financial risk.

In your simple plan so far aside from a lack on a hard exit, I also don't see a hard target. Something to measure against. This might be as simple as a 1% alpha of the market level of return, or an 11% TSR in twelve months or just a number, but without a benchmark how are you meant to measure your performance after 3,6,9 and 12 months?

In addition to testing my analysis/conclusions ability, it also allows me to get all the data into my software, including some manual adjustments and intangible measures, which than gives me the ability to do some back testing of my researched stocks.

To get the easy things out of the way:
1. Yes, I do consider taxation. I do not have any strategy, it is an individual stock decision that is considered at that point in time. I can't imagine I will ever make an stock buy/sell based on tax alone.

I asked the question because you are trading within a SMSF right? Have you considered what other advantages a SMSF may bestow on your goals and objectives?

2. What FA ratios do I employ? None, really. I try to be as thorough as possible to analyze a company as a potential owner. Lots of ratios help me with that, but I don't use any one of them as a trigger. I use different valuations depending on the situation. Usually, a kind of DCF or even a simple earnings multiple.
I fully agree with the fact that cash flow is what matters; I also find that in majority of cases (especially with "good" companies), difference between cash flow and reported profit is minimal. I always check it, but usually than just use EPS, as the difference is not worth bothering about.

Until it is worth bothering about (financial risk = unexpected).

The difficult question is about having a hard sell trigger. As I said in my previous posts, I fully agree with the concept, but can't think of anything that makes sense. In the majority of cases, any hard sell criteria will be linked to a decrease in share price. Most ratios will be linked/related to earnings. And earnings will be linked to share price. Not always, of course, but usually. So, a hard sell criteria = a stop loss order.

Lots of FA reasons of why not to sell on a falling share price. Main one for me is that share price falls after something has happened. By the time I check the price (which I don't do often), the value has already been destroyed. At that point, I need to ask myself, is it the business that has changes, or is it a temporary setback? If the business is still the same (long term), this would be the worst possible time to sell. Bad news, depressed share price, etc. From FA point of view, depressed (temporary) earnings for a good long term business is the best time to buy, not sell.

Having a hard sell when the underlying business changes would be much nicer, but I can't think of any hard criteria for it. The only one that comes close is the resignation of founding directors. That would be a sell criteria in many cases for me, but not always.

OK Do you understand the concept of a free carried investment? Because what I see in the above is a buy and hope. If you cannot think of a method to give yourself an exit, what mechanism will you use to take profit? Perhaps something you could consider (which requires you to be very successful in your stock selection) is to aim to take out of your investment your original funds (or a percentage of your original funds). You have effectively taken back the principle and the remaining holding is "free carried". IE fluctuations in capital value and dividend stream have less impact and risk on your portfolio over the longer term.

With all that said, I still really like the idea of a hard sell exit. Could someone give me an example of what I would use, let's say, on a random portfolio of CAB, SDI, and LYL? Which ratios/triggers should I use?

Thanks Sir O, would love for you to continue to contribute to my thread.

It's difficult (if not impossible) to find a hard sell exit if you don't use FA ratio's, and won't consider a stop loss mechanism.


Cheers

Sir O

 

[craft]

With all that said, I still really like the idea of a hard sell exit. Could someone give me an example of what I would use, let's say, on a random portfolio of CAB, SDI, and LYL? Which ratios/triggers should I use?

I don't use hard exit rules with my FA strategy.

My reason is much along the lines that it’s incredibly hard to define beauty but you know it when you see it.

The trick is temperament. Because even though you don’t have hard exits to reinforce discipline – you must not miss an exit when your judgement tells you the situation is turning ugly.

Obviously my suggestion regarding no hard stops means no safety – you are free climbing! Everything comes down to judgement and temperament.

Diversifying, averaging, buying quality, MOS, keeping to the left of Marks' chart etc all keep your route grade down so with the requisite skill and experience and of course suitable judgement and temperament, free climbing easy routes may be the best risk reward for your personality.

If not, and it appears you need to accommodate

I still really like the idea of a hard sell exit

then make some tweaks to the strategy before you get too committed.



Enjoy your journey.

 

[craft]

OK Do you understand the concept of a free carried investment? Because what I see in the above is a buy and hope. If you cannot think of a method to give yourself an exit, what mechanism will you use to take profit? Perhaps something you could consider (which requires you to be very successful in your stock selection) is to aim to take out of your investment your original funds (or a percentage of your original funds). You have effectively taken back the principle and the remaining holding is "free carried". IE fluctuations in capital value and dividend stream have less impact and risk on your portfolio over the longer term.
Sir O

Never understood this "Free” carried concept seems like some sort of psychological crutch to me. But then I’ve never made a distinction between original capital and open profit either. At risk – Not at risk end of story.

 

[galumay]

keeping to the left of Marks' chart

You have got me intrigued! My google fu only threw up some astrology charts when i searched for Mark's chart,

As Pauline Pants Down would say, "Please explain??"

 

[Ves]

You have got me intrigued! My google fu only threw up some astrology charts when i searched for Mark's chart,

As Pauline Pants Down would say, "Please explain??"

Check the first page of the thread. You are looking for Howard Marks' chart.

 

[galumay]

Check the first page of the thread. You are looking for Howard Marks' chart.

Aghh,...now i feel silly

 

[KnowThePast]

Apologies to all for neglecting to reply to the thread for a couple of weeks, have been travelling and just flat out busy with work.

Sir O and skc, thank you very much for challenging my views.

Craft, your approach is more similar to mine, but I think it needs to be expanded upon.

Having not being able to respond on this topic for a while gave me an opportunity to think about it and I think I can now define it better.

I am now of opinion that, for an active investor like myself, hard exit points, targets, etc. are not only unnecessary, but downright harmful. I must stress that, for a more passive investor, they are probably an absolute must.

So why do I think so? Becase buy, sell, hold, diversify, etc. are no different to one another. One is simply reviewing all options available and based on the best of his ability/experience, makes the best possible capital allocation decision. Both buy and sell are capital allocation decisions and it would silly (IMHO of course), to spend months researching a buy decision, only to sell it later with no thought whatsoever simple because some indicator tells you to.

Sir O quite rightly pointed out that risk lies in what is unexpected. So why use a known criteria for an unknown event? When the event happens, one needs to weigh the options and decide whether selling is the best use of capital at this point in time.

The key may be temperament, but I also think that temperament usually comes in to play when there's a lack of knowledge. The less skill & knowledge one has, the more emotions are on display, and the more a person is driven by it.

One of the biggest lightbulb moments in investment for me was when I realized that I do not need to value a specific company - I just need to compare it to other options and decide where to best put my money. Making sure that "other" options include a cash account takes care of when to sell bit. I find that my emotional attachment to specific companies usually disappears once I look at it in the light of comparable options.

So, going forward, I will revaluate my holdings once a months, and decide whether they are still the best use of my capital, based on individual company's circumstances, tax, and whatever else may be relevant. I will apply the same vigour to this evaluation as I do to my Buy decisions, but I don't expect it to take much of my time, most companies have noteworthy news out juts twice a year.

I will not use sell triggers, because I don't use buy triggers. And if I ever start to think along those lines, I will just put it all into an Index fund, or have a mid life crisis and buy a nicer car.

A big thank you to all, while I didn't necessarily agree with your recommendations, this has been extremely useful for me.

 

[brty]

How does your very first rule of ......

Don't lose money.

...possibly correlate with

I am now of opinion that, for an active investor like myself, hard exit points, targets, etc. are not only unnecessary, but downright harmful.

The problem is that the market is a teacher of bad habits. When something is judged as a good company by any metrics, and the price falls, the temptation is to buy more as it is now at a better price. A lot of the time the stock will turn around and get back to the original price or better. This teaches that buying more 'cheap' is a good strategy.

Of course eventually too much gets put into a good stock as the price gets cheaper and cheaper until it does a BBG or something similar.

Having a hard exit rule, is very had to do as it is a point where you are admitting that you were wrong in the initial investment.
The entire trick to investment by any methodology is to cut your losses so that any one investment cannot hurt you financially or psychologically.

Most people seem to devote their entire investment strategy on entry instead of the equally important exit. You appear to be going down the same path. Most people in the market tend to be losers. There is a correlation there.

Earlier in this thread you mentioned the performance of somestocks since 2008, you did not mention when in 2008. It makes a huge difference as to performance since then. Do not make the mistake that performance in the future from 2013 can be correlated with the performance out of the GFC low.

 

[galumay]

The entire trick to investment by any methodology is to cut your losses so that any one investment cannot hurt you financially or psychologically.

Knowing when to sell a falling stock is nearly as tricky as knowing when to sell a rising stock though, and I think the point KnowThePast was trying to make is that the decision making process should be similar in both cases for a fundamental investor.

I bought a share recently that then fell a further 20%, i re-assessed my initial reasons for purchasing and decided that I still believed they represented good value at the price I bought, despite the subsequent fall. Now they are back up to what I paid for them, a stop loss or other hard exit trigger would have been a poor move in this case.

Perhaps I should have bought more and averaged down, but on my re-assessment I was happy with the position size and so chose not to.

 

[brty]

galumay,

I bought a share recently that then fell a further 20%, i re-assessed my initial reasons for purchasing and decided that I still believed they represented good value at the price I bought, despite the subsequent fall. Now they are back up to what I paid for them, a stop loss or other hard exit trigger would have been a poor move in this case.

Perhaps I should have bought more and averaged down

That is precisely what I meant by the market teaching bad habits. It works 'til it doesn't, then it costs you big time.

It seems to be a lesson that all new market participants have to learn the hard way.

 

[So_Cynical]

When something is judged as a good company by any metrics, and the price falls, the temptation is to buy more as it is now at a better price. A lot of the time the stock will turn around and get back to the original price or better. This teaches that buying more 'cheap' is a good strategy.

This is what i have learnt, and found to be "mostly" true.

Of course eventually too much gets put into a good stock as the price gets cheaper and cheaper until it does a BBG or something similar.

This i have also found to be true although a rare event.

Having a hard exit rule, is very had to do as it is a point where you are admitting that you were wrong in the initial investment.
The entire trick to investment by any methodology is to cut your losses so that any one investment cannot hurt you financially or psychologically.

I think i have found a way around that, using a methodology involving the use of a very small position size, low cost brokerage, no leverage and the acceptance of the rare total loss of a position or 3 over time. This would allow the investor to be "wrong" and only suffer a small $ loss, so that any one investment cannot hurt you financially or psychologically.

While leaving the investor open to the potential SP recovery and opportunities that may arise from holding the (loser) stock...im going to try this with my new IB account, recycling capital from the winners as per usual and avoiding the more speculative prospectors and bio techs etc.

 

[KnowThePast]

Hi brty,

How does your very first rule of ......


...possibly correlate with

There's no relation between the two. That first rule of mine copped plenty of beating already and I agree I should have never named it as one.

It is simply a philosophy that I will attempt to invest in things that have a higher certainty or safety of capital, such as dependable revenue streams or asset backing. The market price is irrelevant here. I do not believe that market price is the correct definition of value (although it is more often than not). Therefore, I do not change my valuations or opinions if share price is the only change. I also don't pay too much attention to last year's performance, unless there's an underlying reason that changes the long term prospects of the company.

The problem is that the market is a teacher of bad habits. When something is judged as a good company by any metrics, and the price falls, the temptation is to buy more as it is now at a better price. A lot of the time the stock will turn around and get back to the original price or better. This teaches that buying more 'cheap' is a good strategy.

Very true. However, that is also the way that money is made if you are a long term, fundamental investor. The trick of course, is to be able to pick which companies will turn around and which ones won't. That is a skill, and one that can be learned if you are prepared to put the time into it. If this strategy is not working, that I would think that either I should learn more, or give up and put my money into an index fund.

Now, most of the time that the price drops substantially, there is a very real reason for it. The point I am trying to make is that once that "reason" happened and the price dropped, it's too late to sell. It would now be the time to re-evaluate that investment and decide whether it is still the best use of my money.

Of course eventually too much gets put into a good stock as the price gets cheaper and cheaper until it does a BBG or something similar.

BBG was brought up a few times already as an example of terrible things that can happen, but I don't think it is an appropriate example, it was not a "great" company by any measure in my opinion.

While bad things certainly do happen to great companies, I don't think it happens often enough to warrant a strategy of selling at a first sign of trouble. Most great companies go on to recover and grow over long term.

Having a hard exit rule, is very had to do as it is a point where you are admitting that you were wrong in the initial investment.
The entire trick to investment by any methodology is to cut your losses so that any one investment cannot hurt you financially or psychologically.

Ben Graham, Warrem Buffet and Phil Fisher might disagree with you, just to name a few.

Most people seem to devote their entire investment strategy on entry instead of the equally important exit. You appear to be going down the same path. Most people in the market tend to be losers. There is a correlation there.

Having an automatic sell trigger, in my opinion, is the exact definition of not paying enough attention to this vital part of investing. I fully agree that sell decisions are just as important as buy decisions, and therefore just as much thought and analysis should go into them. Selling a company just because the price has dropped is just plain lazy (IMHO).

Earlier in this thread you mentioned the performance of somestocks since 2008, you did not mention when in 2008. It makes a huge difference as to performance since then. Do not make the mistake that performance in the future from 2013 can be correlated with the performance out of the GFC low.

It was from the highest point in 2008, the worst possible time you could enter the market, as the priced crashed soon afterwards. I certainly don't expect this to repeat too often, I would certainly expect most years to be substantially better!

If I had stop losses or other auto-sell criteria, I would have not only sold most of those stocks, but I would have sold them at the worst possible time.

Holding on to them until now proved to be a substantially better investment than an index fund.

What's even more important, is that most stocks made money, none anywhere near bankruptcy. But even if one or two companies did go down, it still would have been a superior strategy. If you look at my earlier post, it also mentions that extending time period to 10 years improved accuracy to almost 100%, and provided an even better return as compared to XAO.

If you look at my buy criteria (little debt, good ROC, management with large share ownership, few acquisitions), I reckon you will struggle to find a 10 year period at any time, where 10 stocks meeting this criteria failed to make money.

The past, of course, is not an indication of the future. But that can be said of any share market strategy. So, I think we'll need to agree to disagree on this one.