Sunday, 12 March 2017

Let Your Stock Serve its Purpose

Peter Lynch classifies companies according to different characteristics such as size, growth potential, nature of industry etc.

This can actually be of great use to most investors. We have our portfolio of stocks, companies from different industries, at different phase of their growth. In general, if we ask what are the objectives of us investing in them? The first answer that comes to mind is of course, to make money! What other reasons can there be right, as no one will buy a share to lose money.

But if we were to probe deeper, the question we should actually be answering is how would these companies grow its earnings such that market recognises their ability to grow earnings, and in turn push up its price, realizing its value and growth, and present us with a chance to cash out on our profits.

Answering the question will affect how we position these stocks in our portfolio – positioning of shares in a portfolio matters. What purpose does this counter serve in your portfolio? What sort of investment objectives are they supposed to fulfill?

I classify my stocks primarily following peter lynch method: assets play, turnaround, dividend payers, growth companies etc.  Grouping them this way enables me to be clear about what sort of functions each of them should do to my portfolio. Of course ultimately the goal is for all of them to rise enough to see big profits. But that’s the grand vision. And how do I get there to achieve that vision, in terms of the ways which these companies can have their earnings translated into profits in my pocket? These are the strategies i am very clear about.  

So we watch the portfolio carefully, paying close attention to company quarterly results, monitoring if there are any corporate actions, tracking their weightage in the portfolio. But problems arise, when we mid-way anyhow ‘re-group’ these counters, without valid reasons and analysis related to company fundamentals.  We then assess them using rules for a different category of stock from what they were assigned to. This usually happens when there are big market movements up or down. Asset play turns into growth stocks that we are unwilling to sell even when it has hit its fair value, but choose wait for further ‘growth’; dividend counters treated as turnaround companies, traded frequently for short term profit; growth stocks come to be demanded for high dividends as we turn them into dividend counters.

The fundamental problem is that we analyse and buy company A based on reason 1, 2, 3 and 4. But when its share doesn’t achieve 1, 2, 3, and 4 in a short time, then we sell it because of reasons 5, 6 and 7 – giving final judgement to company performance based on criteria we didn’t set to check against during buying. It seriously doesn’t make sense. Example. there are people who jump in and out of reits capturing small capital gains via few pips movement but could have earned much more if they were just left there untouched and let the dividends compound.  Even worse, there are those who are aware that Jumbo is a growth stock, buy them, hope for it to realise its expansion plan and double in price; but sell them 2 months later after satisfactory quarterly results announced, but with no dividends.

Let this sink in a litter.. Isnt this absurd?? Why do investors behave this way?

Perhaps investors are bombarded with all sorts of intel or insights (or they are just plain info???) by news, economists making estimation, finance talk show host making bold claims, opinions and chatter on forums, websites. It is easy to lose sight of reasons of buying some shares in the first place. Or these reasons tend to change or swayed by market opinions or short term price movements.

Warren Buffet says “You’re right because your facts are right and your reasoning is right—and that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else." If your facts and reasoning keep changing according to the whims and fancies of market, then how?

Humans also have the psychological bias towards notion that the more we do, the better results we will get. This is congruent to most aspects of our life where we believe in hard work will pay off, efforts will not go to waste, persevere and you shall prevail. How wrong all these seemingly undisputable truths are when being applied in investing! I am sure there are no shortage of investors experienced this before, that no matter how much they do, the market ALWAYS beat them, ALWAYS surprise them, and ALWAYS catch them wrong-footed.

Sometimes we should just try not to be too smart in investing, and not do too much. Conventional wisdom that effort/activity input = results output doesn’t apply here in the investment arena.

Why not just sit back, relax, get on with your life, and let your shares serve their purpose in the portfolio? Stop trying to be hyper active, over-analyse, over-rationalise, sell too often, change too frequent. Let you dividend counters continue to put money into your pocket. If your growth counter shows growing revenue, profits and cash flow, continue holding it till its share price shoot through the roof with 50 times PE or until the results stagnate. If your asset play has not hit its fair value, stay faithful and give market some time to wake up to its beauty. If your stalwart companies are not showing 20% growth this quarter, fret not because, hey, you didn’t buy it expecting to show explosive growth isn’t it? You bought them due to its non-eventful nature of business, but yet able to grow 5% a year, and dropped only 10% when market tanked by 30% right? And if you bought a reit and was happy with its 7% yield, why in such a hurry to sell it 3 mths later when you see a few hundred bucks profit?

Sooner or later market will pleasantly surprise you and vindicate your decision. Many times in my holding period of Riverstone I was so tempted to sell when it doubled. But I looked at the latest quarterly results, it is still growing nicely. So I hung on tight for about 3 years till it show stagnating bottom line and I sold off for a much higher profit. I bought ISOTeam positioned as a growth stock. Every half year I studied their results and deduced that they still have room to grow. So I ignored the market noise and left it there and now with a 60% profit. Tai Sin was bought in 2012 as a dividend stock with a 9% yield. Year in year out it gave me a consistent 9% cashflow with steady growth, and I am delighted just on Friday when I saw how much it has jumped. 

Seriously folks. Just let your stocks do their job and serve their purpose. They will reward your loyalty one day. 

5 comments:

  1. Many good points which I have note down for my future reference. Thanks.

    ReplyDelete
    Replies
    1. Good that my opinions benefit ppl..

      Delete
  2. such wise words..i was quick to sell and felt the pain soon after..
    May i ask how many counters of shares should one hold to maximise funds allocation? i have collected 20 counters of shares at bite size in case i lose sleep over it..whats your advice. thanks

    ReplyDelete
    Replies
    1. Think that depends on many factors? Like ur portfolio size, risk appetite, objectives...

      I can only share some principles which apply to me.

      High enough number that max loss in any stock shd not cause significant drop in portfolio value maybe 10%?

      And shd be at a level where u can comfortably monitor resutls by studying each quarterly report on detail..

      For me, I usually cap each stock at max 15% of portfolio (mkt value), above which I will sell some..

      Delete

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