Monday Musings - 11

All through the streets there are mobs of people, yelling, screaming, wondering what will happen next. There are cars flipped, fires burning out of control, and the law seems to have no sway in the way that anyone acts. There is panic and hysteria as fences are climbed and light poles are ripped from the earth...

Are we in post-Super Bowl Philly? Actually that's a pretty good guess (by the way, congrats Eagles and especially Nick Foles). But this also is probably the scene going through the minds of most retail investors as they saw a lot of money being lost over the past two days.

But wait my friends is it really something you should panic over or embrace whole-heartedly?

You may be wondering why you would be writing so joyously about losing roughly 3% of my portfolio. Let me tell you why. The market has been on fire for the last year-plus and there really hasn't been a day like this. That scares me. That also leads me to a very limited amount of stocks to buy at a fair priced.

Also, you hear analysts one after another talking daily about how there needs to be a correction and that the market is overvalued, yet the retail investor is petrified to see this type of correction within their account. A lot of retail investors right now are panicking and wondering if they should sell and try to save some money. Your portfolio is now down year-to-date and you think that you made a terrible decision investing...

Slow patient...look at your portfolio.

Now what I want you to do is something that may scare you. I want you to really sit down and analyze that portfolio. I want you to look at each position and tell me the answers to these three questions:

  1. Why did you buy it in the first place?
  2. Is it now overvalued, fairly value, undervalued? (P/E, Dividend Yield, P/B, etc.)
  3. Is there growth in the company's future?

Now the first question is really, really important. If you don't know the answer to it, or if you answer something like "Because it was on a tear", or "So and so told me too..." then you probably need to empty the portfolio and stick your money in an index fund or other ETF. You first and foremost need to know why you are buying something and must stick with that until you are proven wrong. 

The second question is a bit trickier in the fact that you must know how you value a company. If you don't know how to value a company, then I would go search through the depths of the web or investing books and learn, learn, learn. This will help with times like these when you aren't sure if you should add, sell, or hold. Honestly I know that the VF Corp. (VFC) had a higher valuation than I was comfortable, but instead of paying taxes on my gains, I thought I would rather collect the dividend and let it correct itself.

Finally you really should look at the catalysts for growth in revenue the company has in the future. This is why I like companies like Nokia (NOK) and China Mobile (CHL). This is also why I really was not a fan of Apple (AAPL) as the valuation sat today. Until I saw AAPL show me that next product that will produce growth opportunities I am sitting out. Now I am not saying that NOK and CHL are better companies than AAPL, just better opportunities at their current price point.

So what does this look like in a large loss situation?

A perfect example of that is my Big Five Sporting Goods, Inc. (BGFV) purchase that is currently sitting at a loss of around 30%. Why wouldn't I sell that? Because of a couple things. I bought it because I thought it was undervalued and pays a nice high yield right now that is relatively safe for the next few years. I believe that there will be a run on the shorts at some point but I must sit and wait right now. Now I know that the growth is not there in the future, but at this price it doesn't have to be. This is another opportunity that I am patient to be down on until I see no light at the end of the tunnel.


Look by no means am I saying that I am a great investor that has all the answers, but what I am saying is that I am pretty good at taking my emotions out of investing. Remember that you are investing for the long-term and that you will have ups and downs as the years go by. It is never going to be smooth sailing, for anyone, and if someone tells you they are right all the time then you should run.

As always, feel free to leave any comments below.