Inflation. Deflation. Stagflation.
Markets going down week after week, only to rip up higher.
Headlines don’t seem to line up and so-called experts, who claim to have seen it all before, have as many different views as there are Elon Musk lawsuits.
When there are too many signals and the immediate road ahead isn’t clear, we have to go back to basics when it comes to investing.
Why? Simple. There are only two psychological levers when it comes to investing: greed and fear. And there are only two ways of making money in the market: buying low and selling high, or selling high and buying low. If you’ve noticed that those two are the same, you are correct.
In order to buy low, one must look at the charts, compare them to the past, compare it with similar stocks, and compare the actual market cap of the company (which is the total value in the market) to the assets that company has. Anyone can do this with a bit of effort.
What most people cannot bring themselves to do, despite it being absolutely necessary for success, is the buying part.
If you’re tapped out for hard dollars like yours truly because you’ve over-invested, and putting new cash in is not an option, consider reshuffling the cards.
If you loved a certain company at $1 and it’s now 50 cents, with the same or better fundamentals, it would be nonsensical to not add to the position. The opposite is also true. If you didn’t like the stock you’re holding at $1, selling it at 50 cents is the most logical move. Hoping for the price to go back up without any satisfactory reason, in stocks, is like staying in a stale relationship avoiding a split now, only to have the world’s most horrendous break up in the future.
At any one time, it’s reasonable and expected that some of your stocks will become multiple baggers if you hold as the company or sector improves, but also that some of your stocks will go nowhere. Twelve months from now, you might wish you’d have sold your lowest conviction stocks and doubled down on your highest conviction ones. We don’t need a crystal ball to know this, just think back on your winners and losers and I think you’ll agree.
The following questions will help you to clean up your portfolio:
1- Is this company in a better position, fundamentally or cash-wise, than when I bought it?
2- Do I believe the company is undervalued compared to peers?
And my favourite:
3- Would I invest the amount I currently hold in this company if I were buying it for the first time today?
I know…. This last one hurts.
If any of these are “no”, then it begs the question, why not give your better companies more love?
If you think we may go lower and don’t want to catch a falling knife, fear not, it’s been shown that dollar-cost averaging, which is nothing but buying a bit with lots of frequency, is a great way to accumulate as prices bottom.
You will win some, you will lose some, but when there’s a downturn and companies become undervalued, that’s when absolute bargains can be had if you’re brave enough.
Happy investing… I’m off to reshuffle the cards myself.
–Fabi Lara