Lately I’ve been getting this powerful feeling that everything I touch turns to gold. Every time I buy a stock, it goes up. Did I finally figure out the stock market game? Did I find a secret to Will Rogers’ advice? Buy stocks that go up, and if they don’t go up, don’t buy them.
No, I didn’t get much smarter, and my stock picking skills haven’t improved that much over the past year. I was simply a willing participant in the latest (cyclical) bull market. A bull market makes you feel smarter than you are the same way a bear market makes you feel dumber than you are. Feeling smart makes you do the opposite of what you should be doing. The euphoria of the golden touch is a dangerous thing because it can make you (and me) careless. We forget about risk since we haven’t seen it in a while and focus only on our rewards. You have to actively make yourself aware of the four-letter word R-I-S-K!
How do you do that? My favorite way is to remind myself how “dumb” I am. I pull out an annual return report of a company on which I lost a boatload of money and masochistically try to read it from cover to cover, reliving my “dumbness.”
We all have these stocks, the ones we lost a lot of money in because we were overconfident. We tend to forget about them during the bull market phase. But I suggest you remember them now, so you’ll have fewer of those names to remember in the future. Risk is still there; it is just hiding under the joyful sentiment of the bull market. Believe me, it will show its ugly face. It is just a matter of time.
In the bull market, it is easy to forget about selling discipline and then turn into a “buy and forget to sell” investor. Every time you sell a stock you look dumb because it usually goes up afterward. I recently sold Becton Dickinson (BDX) at about $72-$73, and then it hit $78! I don’t feel smart about that decision. However, when I bought Becton Dickinson, I set a sell P/E, and when it approached I quickly reviewed the stock’s fundamentals – they had not changed much, so I sold the stock.
You cannot worry about marking the “top” in every sell. My objective is not to buy at the “bottom” and sell at the “top.” No, my objective is to buy a great company when it is cheap and to sell it when it is fairly valued! I suggest you do the same.
Vitaliy Katsenelson, CFA, is a portfolio manager with Investment Management Associates Inc. and an adjunct professor at the University of Colorado. His blog is ContrarianEdge.com