My favorite perplexities of investing:
I would only buy a security that fits my entry criteria, but then I would hold onto to it until it hits my exit criteria.
I would then hold on to that security, even if it does not fit my entry criteria, provided it has not hit my exit criteria.
This goes contrary to the popular belief that once an investment does not meet entry criteria, it should be sold, and proceeds reinvested elsewhere. The popular belief is actually quite costly, because you end up with quite a lot of turnover. This turnover ends up costing you in terms of fees and commissions, taxes that work against compounding, and behavioral errors where you end up missing out on a few rare big winners by selling them too early. Auditing your investment decisions will uncover those glaring gaps. Few investors audit their decisions, because not many want to admit (even to themselves) they are wrong on something. But that would allow them to grow and learn and improve.
This exercise has helped me stay invested in companies that looked "overvalued" but kept growing earnings, dividends, intrinsic value. One such example is Visa (V), which has only looked "cheap" per my then criteria in 2011 - 2012, 2015, 2020 etc. This is when I bought it. However, had I sold when it looked "overvalued", I would have ended up paying taxes on the gains, and probably ended up reinvesting the money into something with lower expected returns. I also learned from this exercise that my criteria have gaps and blind spots, which I wasn't aware of until several years later. I don't know what I don't know yet, but I would know that in a few years. This is why I need a process that gives me some fail safes, to protect me against my own brilliance or lack thereof. This is why I need to audit decisions, and learn from them too, in order to improve.
It really helps to have a process that takes care of:
1. Types of companies you invest in
2. Fundamentals and qualitative factors
3. Diversification
4. Entry/Exit Rules
5. Risk management
6. Keeping costs low
7. Continuous improvement
While it helps to have a process, it is also helpful to understand that it has limitations as well. Hence the need to continuous improvement.
This has also helped me stay invested in companies that experienced temporary issues, and it looked like they are about to crumble, but they recovered. Case in point is companies like McDonald's, which many hated on various occasions over the years, mostly due to flat share prices making the chicken littles scared. Patient investors should not be scared from long periods of flat share prices, provided fundamentals are not permanently impaired. These periods probably provide a good opportunity to acquire pieces of good businesses on a rare sale.
That being said, I also ended up overstaying my welcome on companies that ended up not doing as well subsequently, and quietly went all downhill. Cases in point include Walgreen's and 3M.
This is where having risk management process in place, and good diversification helps reduce losses when wrong. I am happy that I limit amount I invest per security to a certain dollar amount (which is basically a % of portfolio value - so for a $100,000 portfolio, I would not allocate more than say $1,000 or $2,000 to a security at cost. If fundamentals change in the process of accumulating a position, I would likely allocate much less at cost than even the $1,000 however)
The downside of selecting a bad investment and staying invested for too long is that I may lose money on it. However, downside risk is limited to what I invested, minus dividends received.
It help to spread risk between many companies and industries and time.
I do believe that the bigger risk is getting scared away from a good company, and selling too early, thus missing out on decades of rising earnings, dividends and intrinsic value.
After all, the most I could lose is 100% on an investment.
The most I could gain is unlimited.
The point of this post is that everyones process has room for improvement. You need to audit your investment decisions, and learn and improve. However, you also need to design fail safe procedures to ensure that any errors you experience before enlightenment are not too costly and that they are limited in scope and amount. The bigger mistakes are not just the losses you will realize, but missing out on the big success stories either because you didn't take your entry signal or you cut a flower way too soon.
