I hope you had a great Holiday Season and I wish you health & wealth for the New Year!
As a new year starts, it is time to review our priorities, set great goals and take some resolutions. I have a suggestion for you; how about not struggling when it’s time to buy or sell your stocks?
I found a way to know exactly when to make my trades and avoid this painful moment of dilemma. I’ll share my method with you as my gift for the New Year.
Am I buying to high?
Will the stock market crash and I will miss a great buying opportunity?
Is it time to cash my profit before it all goes south?
I once had those questions going through my mind all the time. I’m now done with them and I will share how I do it with you. I’m not a guru, I don’t have a crystal ball, I just found the right solution to this problem. Even when you do everything right, the market could throw it all down the drain with one of its many market crash. Then the doubt hits you; is it the time to buy? Is the time to sell? I have money waiting in my account, when do I enter the market?
The Timing to Buy is Like the Timing of Having a Baby
I’m blessed to be the father of three beautiful children I cherish with all my heart. I had my first son, William at the age of 23. My girlfriend and I were discussing the “right” timing for having our first baby. After about a year of back-and-forth, I realise that I would never be ready and the perfect timing doesn’t exist when it’s time to have kids. You know why? Because nobody knows what the future holds for us. Therefore the best timing is already now. It is now because having a baby is a wonderful thing. Do you think it should be the same thing when you find a wonderful company?
First of all, you must remember this undisputed statement: time in the market is a lot more important than timing the market. This is especially true for dividend growth investor. All the time your money is sitting on the side line; it doesn’t earn dividend payments. You not only miss the dividend payment through months, but you also lose their growth. This should be enough to convince you to start buying today. But buying now, doesn’t mean buying anything.
The Investment Thesis is the Core Decision Maker
While “now” is always the right timing to buy a company, it doesn’t mean it is always the time to buy any company. This is when the investment thesis comes into play. You may want to use various stock filters and criterion to build your own watch list or buy list. Depending on your investing goals and your own perception of the stock market, we could debate a while about which fundamentals are the most important when selecting your next purchase. However, one thing we must agree is that only trade based on strong investment thesis has a chance to be successful.
In other words; I don’t think it matters which numbers your look at before buying. What really matters is how far you went to determine the reason why this company and not another should be part of your portfolio. If your investment thesis is well detailed and makes complete sense, there is very little room for a potential catastrophe once you pulled the trigger and add this stock to your holdings.
Writing down your investment thesis is an exercise that sounds quite simple, but many investors decide to ignore because of lack of time or simply because they can’t formulate a strong thesis. Nonetheless, this technique should be at the center of your decision taking process. Once you have determined a strong set of reasons why you should purchase shares of a company, the doubts made by the fact it is trading at its 52 weeks high or that the market has been going up for a few years will disappear.
For example, this is how I decided to buy Disney (DIS) back in 2012. While Disney was trading at its 52 weeks high, I decided it was still the right timing to add this company to my portfolio. Here’s my investment thesis back then:
“DIS has become more than entertainment parks and Mickey. It is now the largest entertainment business in the world. Walt Disney is divided into five different segments: Media Networks, Parks and Resorts, Studio Entertainments, Consumer Products and Interactive. The Media division (ABC, The Disney Channel and ESPN) leads DIS revenue shares with 44% of the company total sales.
Disney has proven analysts wrong by showing revenue growth for its Media division. Many analysts issued concerned over the summer of 2015 with regards to the declining number of cable users. However, ESPN has put its expenses under strict control and keeps showing revenue growth potential. The other divisions will benefit from the US consumers spending more, especially with the coming of the new Star Wars trilogy. Finally, Disney is the strongest brand for family entertainment and this competitive advantage is nearly impossible to replicate. The opening of a new theme park, Disney Shanghai, will also contribute to boost revenues in the years to come. DIS is a strong money making machine generating over $1.3 billion in free cash flow quarterly.”
The next four years prove me right as DIS easily beat its 52 weeks high of the time and continues to pay an increasing dividend payouts at the same time.
Now, When is the Right Time to Sell?
In a perfect world, and especially as a dividend growth investor, I would never sell any of my stocks. The power of dividend investing resides in the power of compounding dividend growth through decades. What Johnson & Johnson (JNJ) is paying in dividend today (2.75% yield) is nothing to what is pays if you bought JNJ 20 years ago:
What was $0.083 per share 20 years ago, has now become $0,80!
Unfortunately, we do not live in the perfect world and examples such as JNJ are not common rules (mind you, there are lots of them!). This is why it is important from time to time to clean up your portfolio and sell some of your holding.
The Investment Thesis is Still the Core Decision Maker
Don’t waste your precious time tracking down your portfolio and applying all kind of rules as 30% profit or 10% loss to pull the trigger. Those kinds of rules are unproven to be successful, time consuming and unproductive.
Instead, use the exact same method of buying and selling stocks. By validating your investment thesis, you will determine in a heartbeat if a company is still worthy of your money or not.
If you have taken the time to write down a strong investment thesis, it will take you only minutes to determine if the company is following this path or not a few years from now. Things you have identify as key factors will be confirmed or not in a few years and you will be in a easy position to either add more of this wonderful company in your portfolio or sell it and hunt for another one.
This is a Simple Method, Not an Easy One
I’ve once read that simple things are not always easy. In fact, it is usually the opposite; simple is often difficult. Using your investment thesis as a core decision maker for buying and selling your stocks is simple. However, defining the right investment thesis is not that easy.
If you are looking for some help to determine your investment thesis and finally get done with the painful dilemma of buying or selling, I will have something for you… but just tomorrow and only if you have subscribed to my newsletter;-)
In the meantime, hit the comment section and tell me what you find the most difficult; buying or selling?