Years of doing research, reading academic studies and working on portfolios (including mine) brought me to this set of rules that enables me to simplify my investing process.
Principle 6 – The Rationale Used to Buy is Also Used to Sell
Writing down a strong investment thesis before buying a stock will also help you knowing when to sell it! Knowing why a company is in your portfolio automatically tells you why it won’t be anymore… More details in the video!
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00:01 Mickey Heroux: Hey, investors, this is Mickey Heroux from Dividend Stocks Rocks. I hope you’re doing well today, we’re already at the sixth investing principle that we have at DSR. So from one to four, we have covered a good set of metrics that you should use to start a filter, start your buy list, not necessarily buy everything that is on that list, but you cannot search a research for a thousands and thousands of company so you need to narrow it down. And the principle one to four has been used to that. And then in principle five, what we have to look at is that you should be investing your money whenever you have some. So you can use valuation model to compare against peers, and then you can look at how it looks overall but then you should not use your valuation methodology as the buy or sell trigger, you should use your money to make it work for you. So now comes down to the real reason why you should buy a company, and the why you should sell those shares, and it’s all found in principle number six, which is the rationality used to buy a stock is also used to sell it.
01:12 MH: So what it means is if you don’t have a strong investment thesis around a company, you should just not buy it. So what’s the investment thesis is basically all the reasons, put together, why you think a company should be in your portfolio why you think this company is so great? It is basically what you would tell your friend, your family at a Christmas party dinner to justify the reason why you bought those shares. So what do we do at the DSR is that we write down our investment thesis for all companies that we buy. And I do that for my own personal portfolio. You know why, because it forces me to think a little bit further. It forces me to think about a potential growth vector, what the company is doing, ’cause if I cannot understand it’s business model, I’ll apply one of life famous, Warren Buffett quote. “Invest in what you know, investment in what you understand”, because if you don’t understand the business model right then you won’t be able to know if the company can grow. What is the potential ed winds and potential risk around the company, because make no mistake, any investment occur some risk. So, all companies, they may be incredibly great they will still be facing risk and speed bumps down the road.
02:39 MH: So this is why it is so important to write everything down. So, in moment of panic, when the market crashes, when one of your holding is going down 25%, and then you’ll start wondering, “Oh my God, maybe I’m wrong. Maybe I did something bad. I should sell it right away and then take my loss.” Well, maybe not, maybe the market is just crazy, y maybe the sector is not doing so well right now, but it will be better in the future. So the best way to answer that questions is to go back to you investment thesis, and read what you wrote in the first place. So is the company still shows the same metrics? If the company shows the same growth vector and the same business model and strategies in place. Are they working? So if all those answers ends with that, yes, then you keep your stock, the market goes up, the market goes down. There’s not much you can do about it. What you can do is follow your stocks in a quarterly basis to make sure that those companies are in good shape and match your investment thesis.
03:49 MH: So in a rare occasion that I sell stock is often because the company doesn’t meet my investment thesis anymore, so this means that I was wrong at one point or the environment changed or the business model changed or the strategies have changed. So, basically, the company is not going towards the direction I thought they would. And I’m not talking about numbers here because you know from time to time, revenues are going to be down, earnings are going to be down. The company may not increase the dividend payment as much as you thought they would, they would maybe increase it by 4% when you were expecting a high single digit number, but that doesn’t really matter. Those are indication that you should dig further. Those are a opportunities to investigate what happened, but those are not a reason to sell. A real reason to sell is when you go back inside the company and then you realize that the business is not doing what you think they would.
04:48 MH: So they don’t dominate their market anymore, they have new competitors, or new technology changing the game, they’re facing other head winds like international problems, tariff and stuff like that. So this is what you need to look at and then once the company doesn’t meet your investment thesis anymore, you just sell it. You don’t have to wonder if it’s the right timing, or if it’s a good timing to set top sells or buy triggers. You buy when you have money, and then you find a great company because great companies will always worth more in the future, not necessarily in the next six months, but in the future they will. When I bought Microsoft, at 75 bucks back in the fall of 2017, lots of people were telling me wait until it drops to 55 bucks. In 2018, the stock jump through 110 I think. So those people, those investors are still waiting and you know what, they might wait their entire life and never buy Microsoft, would I buy Microsoft at the 100 bucks after a year from now. Yes, of course, because I know that in 5 and 10 and 15 years, Microsoft shares will probably worth a lot more than in 100 bucks.
06:04 MH: So in the meantime, I don’t really mind what’s gonna happen because depending on the market mood, it may go down or it what may go up, and it’s just not justified. What is justified is the investment thesis, if you wanna know more about the buy and sell struggle and how to establish investment thesis. I have done a complete webinar about it, so you can just go down in the note and click on the webinar, just a free replay and I have also an article that I wrote about how to set up your investment thesis over at The Dividend Guy Blog so you can get a little bit more information and a little bit more help to know how you can build those investment thesis but put that in a good investor habit. Write it down all the time and then go back in times of crisis. So I hope that you have enjoyed this video. Click on the like button and then follow me for the next one. Next week, we’re tackling it’s final investing principle number seven, cheers.Google+