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#Knowledge: The Art of Holding
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.
I’m accustomed to hanging around with a stock when the price is going nowhere. Most of the money I make is in the third or fourth year that I’ve owned something. – Peter Lynch
Here is a real-life example: I started buying a company I own today in early 2012 when it was at $0.35-0.40 per share. As my conviction grew I bought more and by mid- 2014 the stock hit $2.00 per share. Today (January 2017), the stock is still at $2.00 per share. Yes, I’m up considerably from my average cost basis but this company has been dead money for 2.5 years. Years!
How do I know if I’m right in holding versus just being entrenched in endowment bias?
Let’s get back to some first principles. Sustainable multi-baggers have three characteristics: Long-term revenue and earnings growth with little to no dilution. When you are holding onto a position ask yourself – Is this business growing and making more money per share than it did a year ago, two years ago?
In my real-life example above the company’s business is almost double the size it was 2.5 years ago. Yes, the stock hasn’t gone anywhere but the business is doing really well. I have no problem holding this stock. If the business wasn’t performing, I would sell. Successful investors can differentiate business performance from stock performance and can take advantage of those investors who can’t.
I don’t want to spend my time trying to earn a lot of little profits. I want very, very big profits that I’m ready to wait for. – Phil Fisher
Investing is not the study of finance. It’s the study of how humans behave with money.
#Knowledge: Human Mindset
There was one money manager handling three identical accounts in an identical fashion. After the first two months, each account had grown by $40,000, but the third client had quit.
After another four months, the remaining two accounts had grown by at least $37,000, but the second client had withdrawn. After 14 months, the first client, who had not quit, saw his account grow from $100,000 to $227,000.
What set these clients apart from one another?
Their investment was conceptualized on one timeframe, but two of the clients managed the investment on a shorter horizon. We see the same dynamic among traders who get shaken out of good trade ideas when they replace their profit targets with tick-by-tick market scrutiny.
Anxiety results from the perceived threat of uncertainty. Once we have a profit in a trade, we have something to lose. Uncertainty is now perceived as a threat. That leads us to cope by asserting (over) control, managing the trade on a different timeframe from the one that had initially led to the trade. At that point, we are no longer truly managing the trade. Instead, we’re managing our own anxiety.
That is the very definition of emotional disruption of trading: when what we do to avoid loss prevents us from winning. The ability to tolerate uncertainty separates the trader who trades to win from the one that trades to not lose. We can only benefit from demonstrated edges in the market if we can allow those edges to unfold. – Adam Mann and Brett Steenbarger
#Knowledge: Learning from A short story
A young man in his mid-twenties knocks on the door of the noted Guru. He said: “I’ve come to you because I wish to study Vedas.”
“Do you know Sanskrit?” the Guru asks.
“No,” replies the young man.
“Have you studied anything from Hindu philosophy?”
“No, Guru. But don’t worry. I just finished my doctoral dissertation at Harvard on Socratic logic. So now, I would just like to round out my education with a little study of the Vedas.”
“I seriously doubt,” the Guru says, “that you are ready to study Vedas. It is the deepest knowledge ever known. If you wish, however, I am willing to examine you in logic, and if you pass that test I will teach you Vedas.”
The young man agrees.
Test 1: Guru holds up two fingers. “Two men come down a chimney. One comes out with a clean face; the other comes out with a dirty face. Which one washes his face?”
The young man stares at the Guru. “Is that the test in logic?”
The Guru nods.
”The one with the dirty face washes his face“- he answers wearily.
“Wrong. The one with the clean face washes his face. Examine the simple logic. The one with the dirty face looks at the one with the clean face and thinks his face is clean. The one with the clean face looks at the one with the dirty face and thinks his face is dirty. So, the one with the clean face washes his face.”
“Very clever,” the young man says. “Give me another test.”
Test 2: The Guru again holds up two fingers. “Two men come down a chimney. One comes out with a clean face, the other comes out with a dirty face. Which one washes his face?”
“We have already established that. The one with the clean face washes his face.”
“Wrong. Each one washes his face. Examine the simple logic. The one with the dirty face looks at the one with the clean face and thinks his face is clean. The one with the clean face looks at the one with the dirty face and thinks his face is dirty. So, the one with the clean face washes his face. When the one with the dirty face sees the one with the clean face wash his face, he also washes his face. So, each one washes his face.”
“I didn’t think of that,” says the young man. It’s shocking to me that I could make an error in logic.
Test 3: The young man is desperate. “I am qualified to study Vedas. Please give me one more test.”
He groans, though, when the Guru lifts two fingers. “Two men come down a chimney. One comes out with a clean face; the other comes out with a dirty face. Which one washes his face?”
“Neither one washes his face.”
“Wrong. Do you now see why Socratic logic is an insufficient basis for studying Vedas? Tell me, how is it possible for two men to come down the same chimney, and for one to come out with a clean face and the other with a dirty face? Don’t you see? The whole question is nonsense, foolishness, and if you spend your whole life trying to answer foolish questions, all your answers will be foolish, too.”
May we all have the wisdom to ask, and answer the wise questions!
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