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Dave: 00:37 All right folks, welcome to Investing for Beginners podcast, this is episode 137. Tonight Andrew and I are going to go back to the mailbox, and we’re going to answer a listener question. We’ve got a great one the other day and Andrew and I thought we would take a few moments while who were kidding. We could, it could be a little longer than a few minutes and we’re going to go ahead and answer the question on air for the person. So I’m going to go ahead and read the question and then I’ll have my friend Andrew take a first stab at answering it. So we’re going to go with:
Dave: 01:06 hi Andrew. I have a question for you. If I invest in a company for its dividends and the stock makes a run, and I feel that has reached or surpass what I have figured out what its intrinsic value is, what do I do now? What if the stock starts to decline? Do you sell and wait for a new bite point or do you hold on even if it declines 10 20 or 30% because you like this company? Does it seem like a dual-edged sword? You like it so you want to hold onto it but you don’t want to give up all that equity that you’ve made because of the dividends you could be getting. I need help working through my emotions in this regard, Tom. All right. Andrew, what are your thoughts on Tom’s question?
Andrew: 01:44 I like the question a lot. I think it’s a good timing just based on where I’m at right now in my investing stages, while I’ve been dabbling in with wall street and trading, and I think I’ve said this before probably countless times, but everybody likes to talk about buying stocks. What stocks are we going to buy? Which ones do we think are going to do so great in five, ten years? Nobody wants to talk about the end game. Nobody wants to talk about when you sell and this because it’s generally really, really painful. I think you’ll find it, and I think it’s unhealthy to do, but who are we kidding? We’ll probably all do it, but at some point, you know, you’re going to sell a stock and you know, you check it every so often and see how it’s done since you’ve sold.
Andrew: 02:39 And I’ve had my stocks where I’ve sold them and they’ve continued to rise. And I think, you know, when you look at a situation like that, you have to have maybe a better mindset. So I’m hoping I’m going to be with every time we discussed this topic when it comes to selling. And you know, it’s, it’s something that changes over time. But I’m, I’m hoping that as we discussed this topic that this is something we can help Tom with his emotions through and maybe some other people out there who are struggling with whether they are looking at a stock right now that they’re thinking of selling or they don’t have a set strategy for the end game. And so addressing those two things is going to be helpful. I’ve talked in the past about how I like to split my portfolio into two sections.
Andrew: 03:34 So I have my regular positions, my dividend fortress positions and so you have two different objectives with those, and that’s going to kind of, I don’t want to say it crafts your decision making 100% because the stock market’s never black and white, but I think it helps influence until your decision making. I think it gives you peace of mind because I don’t know about you Dave, but like when it comes to me, when I talk about the selling discussion, I think the most important part is once you’ve made a sell decision, mentally you just need to clear the hard drive, like it’s done. You sold the stock so it could continue to, so let me give an example. Like, let’s say you had Apple, right? And you were able to ride it from a hundred to 300 and then let’s say you sold at three 50 and then it shot up to four 50 I know based on personal experience that selling a stock and seeing that rise in another five, 10 15% is painful just because you feel like, Oh, I couldn’t have held on. But then it’s funny; I think at least most good value investors I think to have a better grasp on this than maybe the average investor. But if we were to look at a stock like Tesla, where, I don’t know if you’ve been checking in on the insanity that’s been going on with that stock lately, but every single time they go up 10% they’re like, Whoa, why don’t we go out 10% more?
Andrew: 05:12 I look at a stock like that, and I don’t; I don’t get upset that I’m missing out on the party, right. Because I see it as another stock that’s irrationally overvalued and it continues to go in that trend. But I don’t, I don’t feel that same pain as selling a, as the example of selling where you had a stock before and now you don’t have it. Now it’s succeeding. But really if we, if we think about the logistics of it, it’s no different. Does that make sense? I mean, have you experienced something like that with your portfolio, whether seeing the stock go up or down after you sold it?
Dave: 05:52 Oh, yes. I have for sure. And it’s very, and it, it makes you second guess your decision and why you’re doing what you’re doing and you, you have that, you know, FOMO thing going on. You know, the fear of missing out and that it can be a very powerful and strong emotion and it’s, It’s very, very difficult to control and to think about why you made the decision you did and you know, of course, you’re going to have those feelings of regret and remorse and you know, why did I do this? And all those kinds of things. And those are all-natural and you should never beat yourself off about doing those things. You need to think about why it is that you did what you did. So when you have those feelings, Andrew, what, what, how do you kind of try to counteract those feelings?
Andrew: 06:45 So I’m haven’t mastered it. I don’t think it’s something you can ever master completely. No, I think, I think you, you have to find ways to, to think differently about it. And I don’t know that it sounds abstract, but I really, I think that it is a mindset thing. And so maybe thinking of it, like I presented with the Apple verse, Tesla example. If you think of it that way, try to think of, well, you’ve separated from the stock and now it’s no different than any other stock that’s not in your portfolio and now you’re focusing more on, you know, what stocks do I have now and what am I looking to buy in the future? I think another way to think about this is what helps me, I guess because I’m the type of person who likes to feel like I have a system.
Andrew: 07:45 No, I have a system and know that there’s sound logic behind a system. And I’ve I’m a, I’ve always been like, I’ve always had a gambler’s side. To me, I love the game of poker. It’s something that’s always been fascinating to me. I love the world series of poker. When I was in high school, that was a lot more popular than it was now. And I love the way that different players and different types of, whether it’s a casino game or humble, know what other games do, you know, there are lots of things you can bet on, whether it’s a horse race, whether it’s a, a sporting event. There are all these different systems you can use to not necessarily guarantee that you’re going to win every time because anything based on the chance there’s never going to be a guarantee about it.
Andrew: 08:41 And that’s kind of what makes it so fun. But you almost want to tilt your odds in the favor, go back to the mathematics and try to make the numbers at least where if you play enough, you have enough of a probability where you’re going to come out on top. And so I think, I don’t know if you, if you saw this, I correct me if I’m wrong, but I think it was Howard marks last memo. He talked on this about the role of chance and games of chance and how that’s affected him as an investor. So for people who aren’t familiar with Howard Marks, he’s a huge name in the asset management space. He’s written several very, very good books about basically buying stocks low and selling high. So he has a value investor and he has these memos, which I know Dave loves reading as well.
Andrew: 09:42 I do. Yeah, they’re awesome. And yeah, your ID did talk about gambling in his last, his last letter. It was, it was pretty cool. Yeah. So you know, having like a system like that, whether it works or not, I think it can help you manage the type of emotions that come with checking up on whether you made the right move or not. When you know you have a system, you know that the system’s not going to be right 100% of the time. When you have a system, you know you’re not going to win every single time. Like why I love poker, and I think Howard marks also talked about this in the memo, why I love poker is because you could play the game right and still lose or you could play the game wrong and still win. And you know, there’s no right or wrong per se, but there is, while you played this hand that had almost no chance of winning, and then you got lucky when the card flipped over and that’s why you won.
Andrew: 10:50 And then conversely, on the other side, as you become more experienced with, with a game like that, you start to understand, well, you know, yeah, I lost that hand. But that doesn’t mean I’m a bad gambler or it doesn’t mean, you know, I’m bad at this game. This is just part of the game. And so I think if we can frame our investment choices kind of like that, either on the buy or the sell, then it can help a lot with the emotions that come with it. Not to say that they’re ever going to go away, but this can be a great first step in managing those is understanding again with the mindset that all right, well I’m going to make great decisions, and some of them aren’t going to work out and I’m going to be okay with it because as long as I have a system that I know that I have a really good feeling and based on, you know, work, research knowledge I’ve picked up, I know that the system over time will tell.
Andrew: 11:54 Then I’m going to be okay, and whether this is the right choice or not, whether it’s going to work out or not, I’m going to be better off and I’m going to be able to move on from this decision. I think that can go a very, very long way and sort out kind of all the rest of it.
Dave: 12:26 I agree with that. And I like the idea of a system and that is something that through the years of Andrew and I work together that I’ve started to create much more of a system than I had previously. And one of the things that I have found that helps me with some of these decisions is creating a journal of my decisions on buying or selling stock in particular buying. Because when I go back and start to second guess my decision or wonder if it’s time to sell or not, by looking at the reason why I bought the stock in the first place helps me put it in place. And it’s not just about the numbers and looking at the valuation and where it is with all the different ins and outs of the metrics and the different sheets, you know, whether it’s the balance sheet or whether it’s the cash flow statement or and so on.
Dave: 13:33 It’s it’s not just about that. It’s also about why I think the company is, you know, the story, why I think the company is going to continue to do well. And if I see that those things are changing, then it gives me a reference point to help me make a more informed decision. But it also helps me emotionally decide that this is time to change it. And it isn’t necessarily some analogies that kind of come to mind when I think about some of these things. It’s football season, the Superbowl’s right around the corner. So I think a lot about, sometimes cornerbacks and cornerbacks are out there, and they’re playing, they’re kind of out on an island, right? And when that wide receiver blows by them and them, you know, a quarterback makes a perfect pass and they score a touchdown on them, it’s embarrassing. And they got shown up on national television.
Dave: 14:23 But to do their job, they have to forget about what happened on that play and go out in the next play because that could be the play that they make an interception and return it for a touchdown to win the game. So the half to have the mindset of that’s one play. It’s in the past, it’s over, it’s done and move on and not worry about it and not think about it. Try to learn from your mistake but not try to dwell on it and in such a way that it causes you to affect your performance going forward. And I think the same thing has applied when you’re trying to decide emotionally to decide to sell a company. And when you make that decision, you know, make the decision and have the conviction of why it is you’re doing it and try to, you know, eliminate any of those negative feelings that can prevent you from making another decision and buying another company.
Dave: 15:15 Or you know, like he’s talking about buying back in when it goes down a little bit. I mean, there’s nothing wrong with that. But so having that mindset, I guess in another, another way is thinking about when you break up with a significant other, and you go and delete all their pictures, you know, he had to take them off Facebook, you’d delete their phone number, all these things. So you can’t go back and look at it. And I have to think about that too. Sometimes with stock, I eliminate it from my periphery. So it’s not something that I, you know, I have to, I have to work at it to look it up and to go back and see what happened with it. And for me, mentally, that’s just one of the things that I can compartmentalize in a way that I can put this in a box and I could set it aside and I’m not going to think about it anymore.
Dave: 16:04 Because if I do, then it’s going to cause all kinds of problems. I’m going to sit in a corner and cry and be super depressed because, you know, why did I give that up? Whoa. But you know, there’s, you know, we all make decisions and we all do things and you know, like Andrew was saying, it’s, we’re on, we’re never going to make a hundred percent perfect decisions. And if we look at the people that we look up to and admire and aspire to be like, Oh, like Warren Buffett for example, you know, or knows he’s made mistakes. He’s, he’s made boo-boos too. And I’m sure he has regrets. He talks all the time about regretting not investing in Google or Amazon at the beginning. And he, he admits that he missed those. And it’s okay. You know, it’s, it’s part of them, it’s part of the game.
Dave: 16:53 You know, like Andrew was talking about gambling. It’s, it’s part of the game, and you’re going to miss some times and that’s okay. And the trick is, is to try to learn from the myths whether it’s good or bad and try to, you know, take those learnings and use those to try to get better at what you’re trying to do. And I think that’s the biggest part and investing is, is probably more emotional than we think about because it’s, it’s tied up in money and it’s not just numbered, it’s where we’re putting our harder and money. We all work for a living and we put that in the stock market. And we don’t want to see that go away. And so like Tom was talking about, or the company goes up and up and up and it’s great, you’re getting all this equity and all of a sudden something happens and it starts turning and you feel torn because you’ve invested your effort and time and money into
Dave: 17:50 This company and all of a sudden it’s not going the way you thought it was. And Hey, the stock market is not as easy as I’ve, I was going to be, and I’m going to have to make a hard decision. But I think once you do make that decision, then you need to stand by it and you know, move on from that and try to like, I try to do as calm, you know, put it in a box, compartmentalize it and set it aside and not think about it. I know that’s easier said than done sometimes, but there are, we all have different tricks and ways of trying to move on from things that have happened to us in the past, whether they’re good or bad, and trying to use those ways to help you feel better. But the trick is, is to try not to beat yourself up.
Andrew: 18:36 It’s also trying not to dwell on things that you feel like you’ve made a booboo on and try to remember why you’re doing what you’re doing. And if you can keep those in the front of your mind, then when you do make a buy or sell decision, it’ll help you in the long run. Remember why it is you did what you did. Yeah, it’s very well said. I think a good Borama there for AI if you’re managing your emotions, after all, is if you can see a stock that you sold and it’s doing well, and you can say, Oh well, good for them. Do you know? And I think knowing that and knowing that, Hey, just because I’m, I’m not necessarily optimizing a hundred percent, Oh, you know, I’m not a robot who’s perfect. But you know, I’m still doing well with my portfolio is still doing great.
Andrew: 19:29 Just because somebody else is succeeding doesn’t mean you’re necessarily failing. So try to kind of flip that on its head and, and get, get what would be a negative emotion working for you positively? I did like the point that Tom made in the question where he said, you know, say I bought this stock, I wanted the dividends, and then I bought it at a discount turns intrinsic value. Now it’s reached we surpass that. So he’s wondering, you know, now it’s turning a corner and maybe it hit intrinsic value and now it’s starting to decline again. He says, do you sell and wait for a new buyer point or do you hold on because you like the company? I think you know, and I could go on and on and on and you can go back in the archives and, and listen to the different episodes.
Andrew: 20:23 We’ve done about when to sell, what to sell, you know, sell rules. We go in deep on some of those, but to, to answer this particular part, I think if you start to talk about selling a stock high and then buying it back low, you’re starting to move into the whole market game. And I think like a value investor, I think it’s reasonable to think that you can buy low and sell high. I don’t think it’s a reasonable to think that you can sell high and then buy low and then sell high and the BI-LO like it’s, that’s a whole other animal on its own because what tends to happen, and you’ll see this, if you look at any stock that’s been very successful over the past three, five, seven, ten years, once they take off, sometimes it’s just no going back. And so you could most definitely sell where you think the intrinsic value is and see it continue just to succeed and continue.
Andrew: 21:32 Because think about the reason why these stocks go up, and we try to talk about how compounding interest builds your wealth by taking dividends and you reinvest them, and now your nest egg is expanding and the bigger it gets, the more it adds on itself. Right? Well, these companies are doing the same thing with their cash flows. And so as they become bigger and bigger and bigger, if there’s in the market that’s still growing, all that success is just going to drive more success. And so by trying to sell high, because you think valuations are getting high and then wait for a chance for it to dip, you buy low again, either you’re going to be waiting a very long time or you’re just going to drive yourself nuts with, Oh man, well I missed 2% because you know, I sold too soon or I bought two Les, or whatever the case may be.
Andrew: 22:31 It’s just, it’s, it’s a great way just to drive yourself insane. So if you’re talking specifically about, I have a stock that I like, he said to himself, I like it. I want its dividends, which is again, those are two very good reasons to hold on. Then you know, regardless of what the stock price does, as long as those two parts are still in there, I see no reason to, to get rid of the stock just because you’re trying to optimize over. That’s not when we’re talking about investing for the long term investing. Like Dave said, your hard-earned money, which is a very emotional and then a very important process and a very crucial part of your life. You need to understand what activities are going to be beneficial to that and which ones are going to be detrimental to the final result.
Andrew: 23:29 And so yeah, you might be able to kind of jump in and out and feel smart for a time. But I mean imagine doing that to like an Apple when it was at $30, you know, and just waiting for it to dip and it never dips. That could be something that is just the amount of magnitude of difference that eventually has, could be so great. So try not to do that. When I buy a stock, I have, again, I’ve talked about a system I’ve talked about. I think I have; I think one of the episodes is like three strikes you’re out. We might have an episode called one to sell that might be in the episode. We’ve had our blog posts, I cannot remember. But basically, what I look for is if the company starts to do something that I do not like, then I have, I have boundaries.
Andrew: 24:25 Like these are hard and fast rules. You do this; I’m out. And then I also have the company is behaving in this way and it’s starting to turn in a direction where I don’t like it. And so I’m seriously considering either cutting it or watching it tightly and then maybe cutting it, lay there. So I’ve done that. And so it’s going to come down to things like debt on the balance sheet. It’s going to come down to, if they’re not able to turn a profit anymore, that’s a big problem. If they’re not going to pay me the dividends anymore. And that’s the whole reason I bought it. Right? So those are the type of things that I think should go into a system like that. And then for the rest of it, if it comes down to, I’m trying to jump in and out, I don’t think that’s a good way to go.
Dave: 25:13 I would agree with that. You do not want to jump in and out that it will, I think, as Andrew put it so succinctly that will drive you nuts. And you know, there are, there are certain companies like Apple that, you know, if you missed out on that when it was really low, it’s not coming back down. Not unless something drastic happens and everybody likes some new phone comes out and now everybody moves to that from, you know, Apple or the Samsung. You know, Andrew and I were talking about that off-air about, you know, how we seem to know everybody that’s, you know, kind of owns, you know, your kind of phone. As my circle of people, I know most people are Apple people. And so, you know, unless something drastic happens as a company, it’s probably, you know, not going to go down.
Dave: 26:06 And if it is going down, there’s a reason for it going down. Things don’t always fall out of favor that drastic way unless there’s something fundamentally wrong with the company. And a, I mean, I think about Disney, it got, I’d love to own Disney, but it’s expensive now and looks ever come back down. Probably not at least not in an anytime shortly with the success that they’ve had with, you know, the movies for example, that, you know, even in the last year, they’ve had five movies that have hit an all-time high. So, you know, that is probably going to be out of my reach for a very long time. So I have to move on and try to find something else. So I agree with Andrew. You should have some hard and fast rules to consider when to sell the company.
Dave: 26:57 And I think going back to what I said a moment ago, fundamentally, if there’s something wrong, if the earnings are negative, I have turned negative for a reason. If their cash flow has changed, if the, the business has changed you think about GameStop is a company that I’ve talked about as a company that I made a mistake on and it’s you know, their, their business model changed and as they’re trying to change it, but it’s been an uphill battle. And who knows whether they’re going to be able to get, get where they want to go, don’t know or not. But again, if you owned the company ten years ago, it’s changed since that point because of, you know, a myriad of reasons. But that is why the is not doing as well as it did. And so it may have been a great company ten years ago, but right now it’s not.
Dave: 27:45 And that’s why the stock market has beaten it up, and it continues to struggle and struggle. And who knows whether they’re going to make it or not. But again, there’s, it changed because there’s something fundamentally wrong. If the company that Tom is talking about, the real likes is declining 10 20 30%, I guess the question I would ask is, is there a reason why it’s dropping that much? Is it, you know, has the business model changed? Is it a commodity? Is there something else that’s going on that’s causing it to do that and if it is then it, it does make your decision easier because things are fundamentally changing with the business for whatever reason. Then it makes it easier for you to decide whether you want to keep it or not.
Andrew: 28:29 Yeah, that was like mike drop material. That’s good. Yeah. I don’t know if fields to add, but those are the thoughts I think that should go through some of these head when they’re considering it and then maybe some thoughts that we talked about the top about how to approach it. So moving forward, You’re In the right mindset, making the right decisions and just, You know, like Dave said, being okay with the decisions you make and moving on.
Dave: 29:02 All right folks, we’ll that is going to wrap up our discussion for this evening. I hope that that helped answer your question, Tom. And if you have any further questions, please let us know. We’re here to help and if anybody else has any other questions out there, please let us know because we’d love to talk to them on air about them and see if we could do some things to help you guys. So if you guys are enjoying the podcast and you have not subscribed, please take a moment to subscribe and if you like it and a little love to give us a five-star review so we could go up in the rankings, so we can help more people, higher. We are in rank is more people can find us. So what? We would appreciate that. So without any further ado, I’m going to go ahead and sign this off. You guys go out and invest with a margin of safety, emphasis on safety. Have a great week and we’ll talk to y’all next.
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