(a stock chart of a business from 2014 to 2018)
Looking at this business, a lot of technical traders would shun this company entirely because of its lack of volatility. How about us — as value investors? I might say, most of us would avoid this company because there is nothing “interesting”.
How about adding some facts:
- Absolute profit has grown 130% in 4 years
- Equity has grown 77% in 4 years
- Zero debt
- Double-digit net profit margins
- Low cash conversion cycle (50-60 days)
Would that change your mind? Probably you would have said yes. However, when it comes to purchasing the stock, it becomes a big agony as we questioned ourselves weekly about whether we have made the right decision.
We allow our emotions to be ruled by the stock prices causing us to have seemingly different emotions throughout the day. When it is up, we are cheerful. When it is down, we are miserable. We became Mr. Market.
According to a research done by Fidelity between 2003 and 2013, the best performing accounts were from investors who were dead! In second place were investors who had forgotten they had accounts at Fidelity.
I’ve gotten to learn the “do nothing” approach from Chris Mayer (author of 100 Baggers) plus Warren Buffett. Charlie Munger once said that Warren Buffett is very good at doing nothing. Well, in actual fact, Warren Buffett controls what he can, and everything he left the market to decide. He still does check on the fundamentals on the companies and so should you. Generally, when an investor’s horizon is being stretched, you unlock an unfair advantage where you could just sit and wait for your business to grow. You are not ruled by emotions. Business does not grow overnight, but over time.
The trick is, when there is nothing to do, do nothing. You don’t get paid for activity. You only get paid for being right.
If you are a patient investor, knowing that you buy a business based on its fundamentals and not price movements, the rewards are for you.
Showing what happened to its share price over the course of past 2 months, it went up over 88.51%. If I simply did a CAGR calculation over 4 years between HK $1.59 (beginning value) and HK $3.80 (end value), it’d be 24.43% which is a very good return.
Many times, we looked at this chart and we asked ourselves…. “wow, I wish I was vested in the company. But if you were to look 2 – 3 months ago, the share price was literally flat.”
But… how many of us would have the courage to hold on to it? Algorithmic trading has taken over most of the volume traded in the equity markets and we are compelled to make decisions so quickly. The average holding period for any stock has fallen from months to days. Even minutes where speculators perform their intra-day trades. Are we like that, too?
One of my favourite screening methods is to look for companies where its market cap growth has not caught up with its fundamentals.
“Market cap growth < Profit or Cash Flow Growth”
As long as it is a healthy company with reasonable metrics which I’ve formulated, I do think it makes sense to hold on to it unless a compelling alternative presented itself.
“The stock market is a device for transferring money from the impatient to the patient.”
This is just one simple degree changed in my investment philosophy almost a year ago and it has helped me tremendously. I “paid” dearly for selling a company for a non-fundamental reason because I was just tempted to lock in my gains. Otherwise, I could’ve been better off… so that experience took me almost 3 months to recover. Sometimes, we are our own worst enemies. Our emotions got the best of us.
I told myself that if I do not change my mentality, I might not be able to grow my portfolio further as I am always locking my gains too early.
It is time to look far.
Feel free to reach out to me with some stories about selling stocks too early or any advice which I could learn! My email is firstname.lastname@example.org.
Have a good day!