On Markets & Investing

More important than finding great stock ideas

4 February 2023

Finding great stocks is not the only source of high investment returns. Investor behaviour is another crucial factor. Do you add to a stock after it goes down, or do you sell after the first 20% rise? Besides, by selling a share in your portfolio to fund a new purchase, you run the risk that the new stock is worse than the one you sold. This could reduce your returns even if the new stock generates positive returns.

As the legendary investor Stanley Druckenmiller once said:
“It's not whether you're right or wrong, it's how much you make when you're right and how much you lose when you're wrong."
From my experience, at least half of your total investment return comes not from what you buy but from what you do after you buy the stock. A book in My Library called The Art of Execution discusses this topic in detail. The author (fund of funds manager) studied the performance of the best portfolio managers for seven years and has come to a similar conclusion. According to the author, when faced with a losing position, the best investment managers either add to it or sell quickly. In contrast, the worst managers often do nothing, waiting for the situation to self-correct.

This may sound counter-intuitive for investors who learnt from Warren Buffett, who constantly underscores the importance of patience and a long-term investment horizon. But one should remember that Buffett is ruthless when dealing with mistakes. He sold many stocks a few months after purchasing them (e.g. ExxonMobil in 2014 and Oracle in 2019).

Apart from more mechanical rules (add after a 20% decline or exit a position completely), I look for more points that either confirm my thesis or prove me wrong after building an initial position.

In this post, I share some signals that suggest that my original investment thesis on CNX is less attractive than I initially thought. As a result, I reduced my position in the company by about a third last week.
Here are the main reasons. Continue reading the updated post on CNX in the Portfolio section.


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