WHEN SHOULD YOU CUT YOUR LOSSES
Sometimes we all pick a share and we are convinced that we are right and everyone else is wrong when the share price refuses to confirm the value we have placed on the share through our meticulous or sometimes not so meticulous calculations. We buy more of the share at lower levels as we cannot believe how cheap the share is relative to our valuations. So rather then buy a share hitting new highs we concentrate on buying “bargains” at new lows. “The market is wrong” we keep saying as the share moves to new lows and sometimes this might be correct if its a thinly traded share but mostly the market knows something we don’t so if a share fails to show fair price appreciation after some time then rather get out and move into something else. This is not to say you must keep chopping and changing your shares but if a share keeps on falling there is something wrong.
WHAT ARE THE BEST STOCKS TO BUY ?
I managed private share portfolios for several wealthy individuals and we had small, medium and large cap portfolios each tailored to the individual’s risk profile. The problem with this approach is it might suit each individual investor but for the manager it becomes cumbersome and time consuming. So we decided to create 2 model portfolios one for small caps and one for medium/large blue chip stocks. Both approaches did well over time assuming the investor let the manager invest how he deemed fit. However this was not always the case though and many times clients wanted instant returns or to include a tip on a share that they had heard from someone else into their portfolios. Mostly the prices of the shares on these tips went south and affected the whole portfolio’s return. So now to me it doesn’t make sense to half manage a portfolio and be forced to sell out of a share just because it had a bad quarter or buy into a share just because it is the latest thing. Investing should be for the long haul.
WHAT IS THE ULTIMATE BUY AND HOLD STRATEGY ?
For Small Cap Investors there is very little chance of a quick return unless you know something (from management) the rest of the market doesn’t and they catch wind of this knowledge just after you have bought (otherwise known as Insider Trading !!) but for the majority of small cap investors it takes time. Sure you hit the lucky one where you buy and the stock rockets upwards by chance of a new deal being announced or some other good story but these are not that common. Being a small cap investor takes a lot of patience. Many a time you will sell by being impatient when the next week the share suddenly rockets. They say that it takes 3 years for a stock to go up a few hundred percent in 6 months. Stocks move very quickly so much so that they are hard to catch. So once you have chosen your stock, make sure it complies with all your investment criteria and then sit back and hold it until its time to re-assess after the next results to see if the company and management are still sticking to your investment criteria. Don’t chop and change as you will lose out and it shows that you really are not sure of your investment criteria.