Worst Timing Ever – And How to Avoid Major Fuck-Ups in Future

Selling some few hours prior to a neat 20% rally sucks (See the RCI Hospitality chart below). I guess we´ve all been there and we cannot undo our decisions. What we can do is trying to avoid similar unnecessary letdowns in the future.

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To do this I will try to put down some principles that might keep me from hastily hitting the sell button. I am aware that hindsight often makes situations appear very clear, which at time of the decision were highly obscure. However, I firmly believe that by following the five straightforward rules below we can avoid RICK-like selling decisions and enable us to fully realise upside potential.

  1. Sleep Over the Decision
    Never execute the actual sell on the same day the selling decision is made. Every decision is connected to emotions. Otherwise us humans would not be able to decide at all. Same goes for the decision of selling a stock. A whole bunch of emotions coming from e.g. the reaction on a just released negative analyst commentary or even the own mood because of todays weather, channel into the selling decision along with the actual facts. Biased actions are the consequence. A good nights sleep sometimes breaks this emotional tie and lets you separate the noise from the signal.
  2. Revisit the Initial Thesis
    In this sense it helps to have on storage some key facts and a simple model on why a company´s stock was bought and what the approximate intrinsic value (conservatively calculated) is. Revisiting notes helps to recall arguments in favor of the investment and makes it possible to assess whether or not new information changes the situation materially. If not, stick to the original price target.
  3. Update the Model to Incorporate News
    If there is relevant news out there it should of course not be left ignored and quick update of the model might help. E.g. in the RCI Hospitality case I should have simply reduced the calculated intrinsic value by the present value of an eventual lawsuit factored by the probability of occurrence of the same. Had I done so prior to selling I would have seen that even a USD 20 mn class action with a high probability of occurance of 50% would have reduced the value of the investment from USD 16 to USD 15 at max. Hardly a reason to sell. Naturally if the so calculated updated intrinsic value produces a price target that is below or very near the current valuation selling makes sense (but only on the next day!).
  4. The Time is on Our Side
    Don´t take all bearish arguments at face value, especially when we are dealing with other people´s opinions rather than hard facts. If there is sufficient margin of safety in the price there is plenty of time to do research and make a picture of the situation for yourself without having to fear a permanent loss of capital.
  5. Proper Due Diligence Equals Robustness
    The better the due diligence the better the understanding of a company the higher the confidence in the own thesis. Nothing is more damaging then having an incomplete or only vague understanding of a company. Know What You Own is the go to solution. News from whatever channel can be borne easily when we know what to make of it and how it affects the intrinsic value of the company of choice. Contrarily, when having only little insight into the investment the constant flow of news will wear us out and will push for very frequent, value-destroying buy and sell decisions.

All in all some principles are quite easy to follow through while others require a little more effort from the investor. A famous saying applies “if it was easy everyone could do it”. And on that Bombshell… just kidding watched too much TopGear as of late.

The returns will appreciate the troubles.

 

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15 thoughts on “Worst Timing Ever – And How to Avoid Major Fuck-Ups in Future

  1. Thinks like that happens to me a lot (not in such a short time frame).

    I sold SBNY for around 110€ a month before the “Trump-Rally” (145 € now).

    I think
    A) such mistakes can’t hardly be avoided.
    B) if the idea behind the action is well thought out, but the outcome is crap, its not a mistake at all

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    1. Hey valuetrade,

      Yeah banks in general are showing a stellar performance. However, I did not see that coming. Who thought that we will see a double in the 10 year in such a short period of time on the back of what everyone said to be a disastrous election result.

      If the selling decision is formed by a process of rationally evaluating incoming news I totally agree with you. But what I feel happened to me with RICK that I failed to do necessary due diligence and basically sold on rumors spread on Seeking Alpha.

      Thanks for stopping by!

      Btw RICK now trades at USD 15.19 … killing me

      Like

  2. A)
    “… and basically sold on rumors spread on Seeking Alpha.”
    I think I remember MMI from valueandopportunity once sayd that he no longer reads “low quality” sources – like seeking alpha

    B)
    “Btw RICK now trades at USD 15.19 … killing me”
    1) A missed win is psychologicaly much painfull than a made loss.
    2) If you still would own RICK – that wouldn be a guarantee for success- you colud be paraliced an waiting for a higher price- till the stock goes back down

    C)
    “In case the company will reach my initial USD 16 target after all, I hope this blogpost helps and reassures myself that back then it was the right decision to sell out and feeling regret about having missed a rally is not warranted.”
    better remember that

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  3. Good. It started bad like for everybody 😉 but turned arround.
    I have more money now then in january.

    The last 2 months were very good – but I am not sure yet how to shape my portfolio for the future (after this “Trump-Ralley”).
    Selling some stocks? Moving more in sectors I consider stable (Nestle, ABInbev?).

    Like

    1. For my part, I wont make any changes due to the recent rally. The positions I am holding are still reasonably cheap even after they have appreciated nicely. Especially at DVA, TPB, IBM, BIDU and CYBG there should be a lot more upside ahead. Tupperware maybe not so much, but i am
      Holding on to it since the underlying business performs reasonably well given the difficult environment in some emerging markets and fx headwinds.

      What are you currently holding?

      Like

      1. My Portfolio is more diversified. Beside of holding companies (like Berkshire and Investor AB –a Index fund – which I see like giving people that I trust money to manage) and my bucket of anti cyclical consumer and health companies (Kraft-Heinz, Walgreens, Becton Dickinson, Coca-Cola, Disney, …) – or like Peter Lynch would say “Stalwarts” …
        … my more interesting holdings are:
        Fannie Mae/Freddie Mac
        Microsoft
        Swatch
        WCM
        PayPal
        Foot Locker
        Great Britain Ideas (Britvic, Whitbread)

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        1. BTW, my selling of McDonald’s could compete with your “Worst Timing Ever”.

          But on the other hand I should not forget, that selling my whole energy holdings (GDF Suez, Eon, RDS, XOM, Eni, Enel, JoyGlobal, CRR) have saved me from some pain.

          Like

        2. Thanks for sharing. Certainly some interesting names there. I have never seen PYPL in a value portfolio. Do you have an article on that?
          On Diversification, I try to put all my eggs in one basket to really profit from conviction ideas (If I am not selling out too early).

          I feel you with MCD. But maybe you are right and over time it the “lucky” purchases or sales make up for it. Still I am eager to reduce early selling for the sake of my returns!

          Like

          1. Hi,
            I use PYPL myself a lot. I pay Netflix, Lieferando, eBay and Deezer with them (regular revenue for them).* If I can use them at other shops, I use them too. The network of shops keeps growing – amazon as biggest competitor of eBay is still missing.

            It is a good service which I like. They moving into mobile and are in a good position to be one of the real big paying providers of the future (some kind of online-VISA/Mastercard…).
            I think the stock is not expensive.

            Links:
            https://commentsonpositions.blogspot.de/search?q=paypal
            http://www.intelligent-investieren.net/2015/11/icahn-soros-paypal-und-die-starken.html

            *btw it made it a lot easier to change my giro account

            Like

            1. I also like Paypal when it comes to usability. Like you it´s my go to choice in online payment. However, I see some challenges regarding competitors that offer the same services at a cheaper price.

              Also the valuation at 26x fwd earnings does not seem especially compelling for me at a first view.

              Like

              1. I made some notes (will go to bed now):

                Do you remember when everybody was thinking now its crunch time, now google enters the social media with google+ and will challenge FB.
                My guess is that we will see the same with Amazon/Apple Pay and PYPL now 😉 – but I can be wrong of course. Its not a sure shot.

                then – there are transaction losses and loan losses – and a big Stock-based compensation (+300 mn Q3).

                My best guess is that the valuation is at 24 PE for 2016 Earnings. Price is high – so is quality.

                Cash and cash equivalents 1,3bn $
                Short-term investments 3,7 bn $

                https://investor.paypal-corp.com/secfiling.cfm?filingID=1633917-16-243&CIK=1633917

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                1. if they have a durable competitive advantage I believe you will do just fine with it. For me this is just too expensive, even at 24x expected earnings. I will have a look at this though when the market hands the stock over on the cheap.

                  btw good old RICK now is at 18. I have to find more of these 😉

                  Like

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