3 action points for stock investors

Feb 18, 2019

Ian Cassel is a long-only, quality-focussed, bottom-up investor. In 2011, he founded MicroCapClub, an exclusive forum for experienced microcap investors to exchange ideas, collaborate on due diligence, and learn from each other.

Here he advises investors on how to stay focused and not make haphazard judgments based on stock price movements.

  1. Don’t be a chicken, be a hawk.

Chickens will eat anything you put in front of them. They will eat insects, bugs, meat, fruit, vegetables, fish, and, yes, even chicken. They have no self-control and will even eat their own eggs and faeces. A hawk can see up to 8x more clearly than the sharpest human eye.

To put in comparison, if you had a hawk’s vision you could see an ant on the ground from on top a 10-storey building. A hawk’s eye is so large that it occupies a big portion of its skull. The hawk knows what it’s looking for. The visual capabilities let the hawk distinguish the size, shape, and speed of the potential prey so it can recognize, target, and capture it quickly.

Don’t be a chicken, be a hawk.

Be picky. As you fly above the investment world looking for opportunities, develop tools, strategies, even statements, that you can apply quickly to evaluate opportunities. Know what you are looking for so you can develop the vision to recognize an opportunity quicker.

  1. Develop conviction to hold on to your picks.

Extraordinary returns follow extraordinary discipline. An investor’s goal should always be to make as few investment decisions as possible. Keep your hurdle rate high and embrace inaction.

Stocks rarely perform in the time frames we predict, and it’s why the market only works for investors that have a long-term portfolio focus.

Performance is never linear, up and to the right, year after year. You sometimes have to hold onto a position for a few years before it goes up 100% in 3 months. Every multi-bagger will have long periods (even years) of stagnation as fundamentals backfill, old shareholders get bored, and new shareholders enter. Just like a fine wine, sustainable multi-baggers often take their time to ascend and develop.

If you’re invested in great businesses that continue to grow and earn more money, don’t let lulls in stock price and boredom scare you out of them.

Lee Freeman-Shor writes in his book The Art of Execution:

One of the key requirements of staying invested in a big winner is to have (or cultivate) a high boredom threshold.  

It is very hard to do nothing but focus on the same handful of companies every year; only researching new ideas on the side.

Many of us, seeing we have made a profit of 40% in one of our stocks, start actively looking for another company to invest the money into – instead of leaving it invested. This is precisely why lots of investors never become very successful.

As human beings, we are very impatient. The hardest part of maturing as an investor is allowing ourselves the time. You can’t force it. Many investors “force it” by being active for activity’s sake. As Ed Borgato says: “What Wall Street perceives as productive activity is needless complexity”.

Investors tend to over-analyze when stocks are going down (fear) and under-analyze when stocks are going up (greed). ‪The hardest part of investing is holding through these times, embracing boredom and inactivity, and distancing human nature-emotion from investment decisions.

  1. Differentiate between business performance and stock performance.

Successful investors can differentiate business performance from stock performance and can take advantage of those investors who can’t. Great businesses have great stocks. Great businesses always get overvalued. It’s important to make investing decisions based on business performance, not stock performance. It’s also important to know the distinction between external stock market forces driving a stock price lower (buying opportunity) versus business reasons you are not aware of (you should be selling).

Ask this of your stocks:

  • Is this business growing and making more money per share than it did a year ago, two years ago?
  • Can the businesses I own continue to grow through a recession? How will it be impacted?
  • Are the products and services they sell a luxury or necessity?
  • Are the products or services so relied upon that if they didn’t exist it would cause their customers a lot of pain?
  • Does the business have a good balance sheet so they can be aggressive and take advantage of opportunities during a downturn?
  • Does it have a long-term revenue and earnings growth with little to no dilution?

Based on the above, if the stock price hasn’t gone anywhere but the business is doing really well – hold. If the business isn’t performing - sell.

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