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Investment Analysis Clubs / The BMW Method
|Subject: A learning curve||Date: 9/9/2012 10:37 PM|
|Author: ThyPeace||Number: 40703 of 42048|
I've been working, slowly, on a new aspect of investing -- stop loss and trailing stops. With a very limited number of exceptions, I have never sold a stock. (Warren Buffett took my Wrigley shares. I don't consider that a sale. I did sell Manitowoc Company shares -- and then bought them back when the price had dropped to something more reasonable.) I've owned some stocks for more than 35 years now, the large majority of my life.
So I am it approaching with caution.
I've been sitting and staring at my portfolio in the evenings for the last few weeks. How do I know when to sell this stock? I've owned it since I was 9. Or 12. Or 21. In some cases, more than 35 years. It's been a friend for a long time. It has a nice gain and a nice dividend that pays more than any savings account, and has for a really long time. Why would I want to get rid of it?
According to the idea of a stop loss, or a trailing stop as I have actually been working, you don't let a stock drop too far before you sell it. This makes sense to me. I capitulated in 2009 at just about the worst time. I didn't do that with my old friends, the stocks I've owned forever. I did it with the mutual funds that were in my 401k. I didn't know them and their habits. Their behavior was bizarre and scary.
But when the stocks I know well dropped so far, I just looked at them again. Nothing had changed in the basics of what the companies do, who they serve, what products they produce, or the quality and integrity of the managers. I sat tight. Wished I had the cash to buy more of those stocks, and did buy more where I could. Each of them has regained its value, and then some.
So it's very difficult, staring at these stocks and trying to decide when to part ways with them based on just a numeric (or a percent) drop,
rather than on the performance of the underlying company. It's not "could I use this money more productively?" even. It's "how do I protect myself from losing too much?" which is not something I've thought about before.
It's part of becoming a more conservative investor, I suppose.
A more recent example is General Mills, which I purchased this spring. When shall I sell the stock> When they decide to make Cheerios with fun marshmallow shapes? When it is no longer the finger food of choice for the 12-month-old set? When moms everywhere decry feeding oats of any type to children of any age? Or when a stock drop of a certain amount makes me, in some way, nervous?
This has been a very difficult concept to wrap my head around. And yes, I realize that the above is an emotional reaction at least as much as a cool-headed rational investor's reaction. I am doing it slowly. All the more reason.
And when I take a breath from my mental ranting and look at the portfolio, well, it makes me look, at the moment, like a freaking genius. I know I'm not that smart. If I were, I would already be independently wealthy, and I'm definitely not that. I know that the tide is lifting even my little boat, and when the tide goes out, I'd like to stay where I am rather than going with it.
So I stare at my portfolio. I look at how much of a gain I have in each stock, at the dividend yields, capital, debt, PEG ratios, and all those good things. And I look at what would happen if that particular stock were to drop a certain amount, and how I would feel about my portfolio overall.
It's hard work. I've set some at dollar thresholds, and as I've learned more, I'm trying percents. I may go back and undo the dollar stops I put in earlier. I may go and undo all of it. But I hope not. I think this is a benefit, and I'm writing about it here both to encourage folks who haven't thought about it yet, and to invite those who have to give me their thoughts on how they do it.
It's sort of like thinking about, and planning, for the end of a relationship. I've been loyal to these companies and they've been loyal to me. It's tough to think of selling because we go through a hard time. It's tough to figure out where that point of "I can't do this anymore" is. I don't want to be foolhardy. I don't want to be greedy either.
And I would much rather set my goals differently: I want to sell this company when I think that it has risen beyond where its fundamentals indicate it should be.
But that comes next, I think, after I consider the possibility that I've made a mistake and that General Mills' Progresso Soups are actually demon food rather than lunch. Or more likely that the Chinese market for Cheerios will collapse, leaving General Mills and Nestle reeling from their investment in Cereal Partners Worldwide. And then we'll have to do without Nesquik AND Bisquick.
Still. It's tough.
ThyPeace, grew up having Bisquick biscuits. Still loves them, doesn't eat them anymore.
P.S. General Mills' BMW chart:
Most Boring Stock Ever. I like that.
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