The DIY Investing Podcast
A focus on eliminating your investment mistakes is the easiest way to improve your investment returns. Don't repeat the same mistake twice by making sure you learn the right lessons. Signal vs Noise. Process vs Outcomes.
info_outlineThe DIY Investing Podcast
Both momentum investing and value investing provide excess returns. This episode outlines how I plan to profit from both forms in my investing process. Specifically, price and business momentum will be added to value investing. The use of price momentum should limit my losses when mistakes are made. Meanwhile, by analyzing business momentum I am likely to reduce the probability of making mistakes.
info_outlineThe DIY Investing Podcast
The process of researching stocks requires a significant amount of time investment. You should optimize the time you spend researching by focusing on three questions: Cheap? Good? Safe? You should be able to answer in ten hours or less.
info_outlineThe DIY Investing Podcast
In this episode, I discuss the coffee can portfolio approach to investing. This investing strategy involves never selling a stock once it is bought. Therefore, you must seek high-quality companies with long runways for growth and high returns on capital.
info_outlineThe DIY Investing Podcast
In this episode, I outline my top investing goals for the new year. I aim to identify 2 new companies worth buying and my goal is to attain a 20%+ annual return for 2021. I also cover process-based goals relating to how to go about investing research. Finally, I would like to pass the Series 65 exam so that I can begin managing money for outside clients.
info_outlineThe DIY Investing Podcast
Many value investors lack a clear strategy on when to sell stocks in their portfolio. This decision ought to be based on opportunity cost, potential investment mistakes, intrinsic value, and return differential between old and new companies.
info_outlineThe DIY Investing Podcast
An investment is any investment operation that utilizes a margin of safety, provides an adequate return of 10% or more, earns that return from fundamental cash flows, is a positive-sum game, and bounded by a range of prices and terms.
info_outlineThe DIY Investing Podcast
Terminal Value is the net present value of all future cash flows discounted back to a specific year in the future. Intrinsic value is fixed, but your estimate of intrinsic value will change over time.
info_outlineThe DIY Investing Podcast
The Deflation Myth has been accepted primarily because economists have used false assumptions in their analysis and because debtors, namely world governments, tend to hold massive political and cultural power. It is in their best interest to convince you that deflation is bad so that they can inflate away their debts. Yet, most investors are harmed more by inflation than they would be by deflation.
info_outlineThe DIY Investing Podcast
Be conservative when valuing companies. Don't give managers credit where they don't deserve it. Enterprise value should only be used when companies hold debt. Yet, you should only buy companies with net cash.
info_outlineMental Models discussed in this podcast:
- Opportunity Cost
- Rebalancing
- Coffee Can Portfolio
- Intrinsic Value
- Optionality
Please review and rate the podcast
If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.
Follow me on Twitter and YouTube
Twitter Handle: @TreyHenninger
YouTube Channel: DIY Investing
Support the Podcast on Patreon
This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.
Show Outline
The full show notes for this episode are available at https://www.diyinvesting.org/Episode106
When should I sell stocks? (Question from Patron)
There are a few key considerations:
- Opportunity Cost
- What else do you own?
- What is your current best idea? How much of it do you own?
- Trimming Positions
- I don't like doing this. All-or-nothing for me.
- There is a huge difference between selling into cash versus selling to buy a new stock
- Perhaps you consider selling to cash at a P/E of 35, but otherwise only sell if you have a better stock to put it in.
- I may be fine selling a stock at a P/E of 20 (that I think is worth 25) and buying a stock at a P/E of 5 (that I think is worth a P/E of 15). My return prospects are better.
What if my thesis was wrong?
You should sell a stock if you've made a mistake. If you were wrong about the thesis or your thesis has broken you should sell.
This is hard to do and I struggle to do so myself, especially if the price has fallen substantially.
Other Considerations:
- Coffee Can Portfolio
- Seeking "Never Sell" stocks - only certain companies qualify
- Benefits from a deferred tax liability (can become quite significant over time)
- Preferable for individual investors. hard to implement professionally.
- Return Differential
- Don't sell a stock because a new idea is 1% better.
- You want at least a 5% return differential.
- Future returns are 5% when the new idea is 10%
- OR future returns are 10% when the new idea is 15%.
- Don't quibble over small differences because those differences are within your margin of error.
- Question from Patron: "Should I buy great companies during their growth phase and then sell when they lose their advantages?"
- A few problems here.
- It is difficult to predict when a company will lose its advantages.
- Likewise, once a company is recognized to have lost its advantages, usually, the price deterioration has already occurred.
- If you want to maximize profits, you likely need to sell BEFORE advantages have been lost.
- Positive Optionality and Selling Above Intrinsic Value
- It is almost impossible to accurately calculate intrinsic value.
- Consequently, it is likely a mistake to sell when a company reaches your calculated intrinsic value.
Summary:
Many value investors lack a clear strategy on when to sell stocks in their portfolio. This decision ought to be based on opportunity cost, potential investment mistakes, intrinsic value, and return differential between old and new companies.