Extraordinary returns
follow extraordinary discipline. Discipline in buying and selling, and maybe
the most important one of all, holding. Developing the conviction to hold is
something that I’ve learned over time. It didn’t come easy. The basis of this
article is to give some insight on how to develop the conviction to hold your
winners. It is very tempting to sell along the way, and its okay to take a
little off the table, but the big money is made by holding.
“It never was my
thinking that made the big money for me. It always was my sitting.” —
Reminiscences of a Stock Operator
Many of us, me
included, look at stocks that have made big moves and think to ourselves, “If I
would have only knew about that company and bought it back then.” But would you
really have developed the conviction to hold during the run up? The problem is
that to achieve a multi-bagger in the portfolio, you have to hold a
multi-bagger. And if you want it to change your life, you need to hold a lot of
it.
Don’t bother finding
the next multi-bagger if you aren’t going to develop the conviction to hold it.
Over the last decade,
I’ve been lucky enough to be invested in a few stocks that have gone up
5-10-20-30x over a multi-year time horizon. From my experience, the only
way to hold onto a big position after it makes a big move is to know the
underlying company better than anyone else. Greed and fear will test your
resolve, so you need to learn to keep these emotions in check. You need to
believe in your due diligence and form an unwavering conviction.
So how do you develop
the conviction to hold?
A lot of due
diligence is on the front-end of a buying decision, but it certainly doesn’t
stop there. The maintenance due diligence following the buy decision is even
more important. For me, I talk to management regularly and keep close watch of
all the ancillary forces and trends that are driving the company’s business. My
“edge” knows my positions better than anyone else. This doesn’t mean I’m going
to be right, but the more I know the better.
I think many
misperceive high conviction for close-mindedness, ignorance, and arrogance. The
conviction I’m talking about is quite the opposite. You need to constantly
assess your positions and openly listen to counter arguments. Only then will
you have the conviction to hold multi-baggers because you will understand all
sides to the story. You also need to develop a thick skin. If you are not ready
to be criticized for your convictions then you aren’t ready to make real money.
I believe most
investors focus too much on selling strategies and not enough time on knowing
what they own. Selling strategies such as, “Sell half after a stock doubles” or
“When a position reaches 10% of the portfolio, sell it down to 8%” are meant for
lazy investors. These selling metrics-formulas-strategies sound great in
academia or when selling an investment strategy to a bunch of lemmings who
can’t think for themselves. The truth is if you know what you own at all times,
you’ll know when to sell.
In many cases the
stocks I’ve owned were better buys after they doubled then when I initially
bought them. In many cases when a position became 30% of my portfolio there was
a reason for it. The underlying business was doing really well, or
institutions were just starting to nibble on shares, so why would I sell it.
Just because a stock doubles, triples, etc, doesn’t mean it should be sold.
Stocks should be sold when your maintenance due diligence shows something has
changed. If you know the story better than anyone, you’ll likely get clues well
before the rest of the market. When a company performs, and the story hasn’t
changed, stop trying to change it. Enjoy the ride.
When a stock goes on a
multi-year run there will be long periods of time when nothing happens. These
are consolidation periods when old shareholders are selling and new investors
are buying in
A big part of
successful investing is becoming content doing nothing. If you are in great
companies, a lot of times your biggest risk is boredom. Warren Buffett’s famous
quote, “Our favorite holding period is forever”. If he likes where the business
is headed, he’ll continue to hold it and probably buy more. Don’t be active for
activity sake. Remember, there are no day traders on the Forbes 400 list. Learn
to be content holding and doing nothing.
“Patience is power.
Patience is not an
absence of action;
Rather it is “timing”
It waits on the right
time to act,
For the right
principles
And in the right way.”
– Fulton J. Sheen
As a microcap investor
who invests in companies with little to no institutional ownership, I want to
hold for the institutional rally. When a management continues to execute on a
great story, at some point it’s going to attract institutional inflows. You will
see this when an illiquid stock all of sudden gets propelled by a sustained
period of above average volume. Hello Institutions!
A multi-year run is
made up of a bunch of mini-cycles that can last weeks or months. During these
times the stock can become undervalued or overvalued. Quite a few professional
investors I know like to trade 10-20% of their full position during these
swings. For my psyche I’ve found it to be counterproductive. If I own a $5
stock and think it might go back to $4 before it goes to $10 in 12 months, I’m
fine simply holding it through the mini-cycles.
I hope I’ve helped
shed some light on a hard but lucrative topic. Many investors spend all their
time trying to find great microcap companies only to sell them after quick
paltry gains. If management is executing and the story hasn’t changed, hold on
for the real money.
Find great companies, develop the conviction to hold them,
and it will change your life.
Courtesy: Original Author Mr.Ian Cassel
