Stock market investing
Welcome to investing for beginners podcast I’m David Ahern, and Andrew Sather is here with us tonight. We’re going to talk about investing checklists; we’re going to talk a little bit about when to use checklists and how they can help you when you make buying stock decisions as well as selling stock decisions.
- Checklists can help control your emotions
- They are great at helping you avoid mistakes
- They can be as short as four questions or as long as hundreds
- Stock checklists are perfect for buying and selling decisions
I’m going to start us off and talk a little bit about my friend Mohnish Pabrai. I’ve talked about him in the past, he’s an investor that’s originated from India, and he’s a value investor cut right out of the Charlie Munger, Warren Buffett ilk.
He’s very conservative, and he’s been very very successful with his investments I believe he’s in the high40% range in returns over the last ten years or so so he is one of those gentlemen who has a very concentrated portfolio.
I believe he only has six or seven stocks in his portfolio right now and
the majority of them is in actually one or two companies. He’s written a book called the Dhando Investor, and if you have not read this book, it is fantastic. It’s effortless to read, and he lays out a lot of his investing principles in the book.
He’s very very well-read, and he’s a great writer I’ve talked about this before, and I enjoy his writing, and he’s just he’s one of those people that’s so smart that he’s good at explaining things.
It makes it sound easy and Andrew, and I have talked a lot about this. These are simple ideas that we talk about, but they’re not easy to do. So with some of the checklists that he speaks about in his book, I’m going to kind of outline those a little bit. These are some of the things that I use when I’ve created my checklist, and one of the things that I wanted to kind of say well as we talked about checklist tonight these are personal decisions that you make.
Andrew and I are going to give you some ideas of some things that we use and our checklist. But I agree on withMohnish Pabrai. He has never revealed his complete checklist, as well as Charlie Munger, has not and Warren Buffett because these are personal ideas.
These are things that you have to experiment with on your own. You can use some of the things that Andrew and I talked about today as guidelines, but you know as you get more experience with your investing.
I would highly encourage you to create your checklist kind of go from there.
some of the things that I kind of use is a guideline for me.
- focus on buying an existing business
- buying simple businesses and industry with a superslow rate of change
- buy distressed businesses and distressed industries
- buy businesses with a moat that is a big one
- bet heavily with the odds are overwhelmingly in your favor
- buy businesses at big discounts to their underlying intrinsic valuing-ding-ding that’s huge for us
- we’re low-risk high uncertainty businesses,
This is a great place to start as a framework for a checklist, and I’m going to cheat a little bit about each of these a little bit, review so you can throw your two cents worth as well.
Focus on buying existing businesses for me this is all about looking for companies that are already out there. We’ve talked a lot about IPOs in the past and IPOs are can be a very dangerous thing to get into. So looking for a company that’s already in businesses already doing what they’re doing for several reasons. One you’re gonna know where the sales are coming from where the profits are coming from where the earnings are coming from whether they’repaying a dividend or not. Those are things are all going to be out there and easy for you to understand.
Buying simple and businesses with industry with the superslow rate of change. You know we’ve talked a lot about this and looking for a business that you can easily understand. So you know getting into something that’s in biochem for me is going to be but I’m just not smart enough to understand that type of business. But maybe getting into something that has to do with restaurants or banks or you know in the food industry. Or something along the lines of trains.
Alright, things that you can read the 10k you can easily understand. Those are things that are things you can kind of wrap your brain around.
Buying a distressed business and a distressed industry. Looking at things that are beaten up. We’ve talked about this in the past; you’re looking for companies that are strong businesses but they’ve been beaten up because they’re in an industry that’s being beaten up because there may be a downturn in the economy, there may be bad news that comes out from that particular sector.
You know there’s a lot of different things that could go into buying a business with a boat.
That’s obviously a huge, huge, huge one you know looking for a company that is going to have a durable competitive
advantage. That’s a little you know nod to my friend Charlie Munger.
Looking for companies that are going to be strong businesses that have built a strong business over a long period and that have been able to sustain through the thick and thin of credit cycles. And as businesses go in and out of being popular and unpopular as well as in the stock market as well as just generally.
Bet heavily when the odds are ever in your favor you know that is something that Mohnishtalks a lot about in his book. And you
know that’s not something necessarily that I subscribe to, but he talks about that quite a bit in the book.
Buy businesses of big discounts to their underlying intrinsic value. That is huge for me looking for a margin of safety, that’s what he’s talking about with this. You know the bigger margin of safety you can buy the better you’re going to be, and it’s going to help you make a whole lot more money when the stock market or when the business rebounds. And you’re also going to help you if you do make a just a bad decision or the underlying fundamentals that you’re looking at or maybe not as profitable as you thought. Then you’re not going to get burned as badly.
Looking for a low-risk high uncertainty businesses that also a big one kind of tagging in with the intrinsic value. Warren Buffett is obviously a big big fan of the checklist. He has a kind of a simple one that’s outlined as well. Mohnish Pabrai has revealed that he has 97 to 98 questions that he asks about a company, it takes him about 20 minutes to run through them.
Basically what he does when he’s looking through this is the uses his checklist as a way of looking initially at a business and if he can answer all those questions about 20minutes. Then he’ll start digging into it and looking for more information to see if this is indeed something he’s going to invest in.
And he has groups that kind of narrows everything down to, and I like this as well. Valuation obviously we endured, and I’ve talked a lot about that leverage management and ownership. Looking at the-the management and whether you think they’re good or not oats and personal biases you know well, so we’ve talked a lot about that as well.
So why are we talking about checklists? So checklists the reason why checklists are so effective is our brains are designed to take shortcuts and arrive at answers quickly.
When you see a lion, I run no you don’t process your options just run, and that’s kind the way our brains are designed.
And so we think about checklists, we reflect on from my own experience, I love when I have a checklist, and I can cross something off. It’s like you get a little bit of an endorphin rush from being able to knock something off your list. And that’s one of the things why checklists are so effective.
Also because we’re human, we also mix rationality and emotions when we notice the great businesses that are valued.
We were we read up on it we run through some you know questions we arrive at a decision. And it’s not as efficient as a checklist when you have a checklist, and you have things that are concrete that you can run through and run through and run through. You won’t run into this you’re falling in love with a company and making a decision to buy it actually because you’re biased about the company. Not because all the other items in your checklist are being met and you feel comfortable and about making a good decision.
When you’recreating a checklist I have about 50 questions that I run through and it a lot of it frankly centers more around the numbers part of it and some of it about a lot of the rest of is more about management and then a little bit more about the personal
biases. But I try hard to keep it numbers base because that too eliminates a lot of the emotion of it, and so that’s kind of where I fall in the checklist part of it.
Be interested to hear what Andrew thinks about what I was just saying?
Andrew: well first I would say I think it was an excellent brain dump. Giving me a run for my money here. Help me how do I follow that up yeah I’m curious so like whatever you talk about personal biases, can you give an example of maybe one or two of those because when you talk about the benefits of a checklist, I think that’s probably the biggest benefit.
There we always talk about. I love just to say you know numbers don’t lie look at the financials the financials will tell the picture. Make sure you’relooking at the complete picture, and so you know having a checklist is just another way to take away the emotion and look at the logical side.
Look at the rational side look at what the real picture of the stock or the businesses.
I’m curious you know other than I guess obviously having valuations and metrics would be a big part of that. Are there are there specific ones that you would use?
Example of a company that when I first really started getting into investing and started kind of diving into the numbers.
I had read a quote about Peter Lynch, and we’ve talked about this before where he talks about investing in what you know, and so I started looking at Starbucks. I am personally not a huge coffee person but my wife is, and so I thought you know I know a little something about restaurants and know a little something about what they do.
My wife obviously is a huge fan of their products, and I already spend a lot of money with the company, so maybe I should look and see if they give some back, and so I started digging into the company.
I went into the company looking at going I already wanted to buy it, and so I started looking at the numbers, and I came to across a couple of things that were concerning. Number one that at the time their same-store sales were not as strong as they were expecting them to be. And also their debt to equity ratio was steadily increasing and so as you know somebody was a value investor that set off big red flags and so as I started digging in more to it. They were using some of that leverage to try to increase their earnings to make the stock look more attractive to investors, and that was a big note for me.
And I just I was like okay no passing on this, and so that was a company that I I wanted to buy it, I did I was all set to pull the trigger on it but as I started going through the books that I was starting to create.
That was one of the first biggie’s, and I got that from our friend Andrew after reading his book about the metrics that you can look at to help you start to decide whether you want to invest in a company.
And so that was one of the first ones I put on my checklist, and that was sure enough when I came to that part of their financials I was like okay yeah we need to look at this more. Okay yeah, we’re going to pass on that, so that was a company that sprang to mind right away when you asked me that question.
Andrew: that’s cool I mean I don’t know how they’ve been doing lately, but we haven’t seen the bear market in a while, and so those companies that can get away with rising debt to equities will do so.
Until like Buffett says when the when the tide goes out then you see who’s not wearing pants. Okay yeah I mean I don’t know what the stocks were done since but I think just thought the real risk or danger is probably to be seen into the future.
Dave: yep I agree so I think that you know to me that was where you know like you said you could tell where the
Tide was going to go out, and that scared me off. So that was one company that sprang to mind I would have to think it might have to get back to you. And another one more recently because I’ve tried hard to check you know as I’ve grown more experience and more confidence in whatI’m doing. I have tried hard to check you know that impulse to go out buy Nike because I love their shoes or go out buy you know uh you know a restaurant because I like their food or you know a guitar because I like the guitar, or you know a wine distributor because I love wine.
so I’ve tried to check that by having a checklist it’s helped me eliminate that bias from my thinking and excuse me for being cognizant of it because you know what happened with Starbucks.
Luckily I did buy the company I ‘m sure it’s gone up since then because everything in the world’s gone up except you know of course Snapchat. And you know some, but you know that ourselves on the
Andrew: yeah yeah quick 15-second break
Dave: yeah yeah okay we’re done moving on so that’s that’s I guess that would be my thought on that.
Andrew: I think it’s interesting too I mean maybe it’s like a branch of confirmation bias haven’t heard that talked about much as far as I don’t know what you call it like a familiarity bias. Where right you know it’s just like these products other it’s not necessarily the bad thing you know. It’s obvious I have hygiene products you know food products. All those sorts of things I do feel that special pride when I look at my cupboard, and I see oh this looks this is one of my dividend fortresses. Yeah, it’s cool feeling because then you feel like you’re contributing to your wealth.
But at the same time having a checklist make sure that you’redifferentiating from just investing because you want to be a fanboy or investing. Because this is a right decision
Dave: right exactly you know we think that you know I am I’m an apple person. I love their phones I love their products and you know that’s a company that I have many times looked at and thought about investing.
But I get concerned because they’ve they ‘ve tried so many different other things to try to differentiate and get away from the iPhone being their thing. And you know one of the concerns is because it’s a technology company, what happens if seven years from now something comes along that just makes a iPhones obsolete.
And you know we think all that’ll never happen, but you know think about our lives ten years ago they were not there was no iPhones. You know and so you know it’s it’s become such a huge force in your life it’s such a short amount of time was to say that something couldn’t come along and make that obsolete again.
So you know it made me it’s made me hesitant to pull the trigger to buy into the company even though it’s a great company and they you know do a great job, and they got you know just tons and tons of cash on their balance sheet. You know that’s it’s a concern for me so you know it’s it’s one of the items on my checklist that long-term I don’t know if they’re going to be profitable
Andrew: so yeah enough I’ve run Apple through my VTI haven’t done in like the last couple months. But I knew at least six months to a year ago, and I found it was not quite like like a strong sell where it’s like I’ll stay away, but it’s not quite at that as a discount.
Or what did you call a moat but it just didn’t have like a margin of safety that no it’s official enough from a price basis so on an earnings basis it was you know it’s doing fantastically again on a cash basis it has just gobs of cash. But like you said to think that’s especially crucial to use some intuition into looking at that particular company.
Is that maybe it would be more of a prudent investment if it had let’s say more assets on their balance sheet or more of a more of revenue. You know it’s like the things like cash or earnings can evaporate quickly, so you have to take that into account.
And when you couple that with the fluidity of the tech industry I think it’s the just good thing to consider. And I think Imean obviously value chart indicator an, and it agrees with you, but I think just, in general, it’s a good kind of approach to take when you’re looking at this kind of different opportunities.
Dave: yeah exactly and to kind of tag along with what you think about the companies since Steve Jobs passed away. He was the driving force in the innovator, and since the company since, he passed away the company is obviously running perfectly fine, and this is by no means a dish against the company.
But they’ve been floundering to find innovation, and you know that is when you talk about management. Those are things that you have to take into consideration, and you have to think about the type of business that they’rein. And they are very much in technology innovation type business, and that is one of the concerns about the company is what are they going to do to continue to evolve and separate themselves from I hate to come back to the iPhone.
But what are they going to do to separate themselves because you know that was one of the things that Microsoft struggled with for years was what are they going to do to differentiate themselves, and they’re starting to come out of that with the cloud computing and becoming a leader in that? And you know that maybe will set them apart five-ten years from now, but they’re going to have to do something else, and that’s that’s what the Warren Buffett all along has been one of his concerns about
getting into the tech realm.
I think that was one of the reasons why he’s been so hesitant is because of there’s much change, and that’s one of the things that Manish talks a lot about in his book is trying to find stable uncertain high, uncertainty businesses. Something that people are always going to need like Andrew is talking about the staples that you need in your cupboard and has done you know the stuff you brush your teeth with.
You know we ‘re always going to need those, which I think kind of segues into when they want to talk about the moats.
Andrew: so this is something that’s not again not talked about too much. The way I mainly look for info is I look for info from a financial perspective.
I think everybody knows how much focus I like to look into the numbers. But there was sometimes a couple of years ago were stumbled into some research, and I think people who maybe find this like really intriguing really like maybe pursue it and find you know pull wisdom and lessons out of it.
That isn’t popularized too much when you go look at the different investment classics that are out there in the bookstores. There’s this idea of it’s called I’m looking at the blog post right now it’s called theGreat Depression distribution by prey though I guess the power law distribution, so there’s like for the 2010 rule if you go to Google for example. Type in any search on Google, and you’ll find that where people click tends to follow this for 2010 rules 40% of the people will click on the first result 20% the second 10% the third result and this has a lot of parallels and lots of different aspects of life.
it might be a little bit woo-woo or a little bit out there, but you can look at you know different sports teams in religion that you have the Holy
Trinity, there’s a lot of emphasis on the number three when it comes to a lot of writing rhetoric stuff like blood sweat, and tears tell the truth the whole truth nothing but the truth there’s.
Just this something about the number three and so what’s interesting is you tend to see this happen a lot of industries. So take for example the solar industry who are the big companies pretty much it’s justCoke Pepsi and Dr. Pepper I don’t know if Dr. Peppers owned by one of those two now but I know I mean that’s that kind of the-the general thing at the time.
I wrote this you know you had American United and Delta were the big three of the airlines GM Ford and Chrysler were the three big three American automobiles and for the Germans, you got the Audi Mercedes Benz and BMW.
So what tends to happen in these industries as they mature is you tend to get these big three type of companies that start to in a sense take over, and you might have smaller competitors, and they start to get swallowed up by these big companies. If you look this parade of love for 2010 kind of breaks down to a tee with a lot of that, so I think to have that moat and looking for something that’s like you told Dave something that’s certain there’s not much uncertainty around how these earnings are being made.
What’s their positioning in the marketplace being on that for the tail of an industry is going to bring some serious wealth not just in the next year but compounding over the next very many years? And if you combine that with a strong financial position and even more so with a discount to their true intrinsic value now you have all these sorts of forces working together in one magical way, and it can make for some nice returns.
Dave: yeah that awesome. Yeah that’s a that’s a great analogy and I you think about it you know as you were talking I
started thinking about that there are so many different phrases and different ways that we think about things in threes its interesting isn’t it yeah that’s the left-field but I you know there if you look up Pareto’s law you’ll see this graph, and it perfectly follows that for 2010.
You’ll see it a lot in the example I gave in the blog post was MBA finalists and then grab those teams, and it follows that perfectly like the chart has this Pareto’s law graph, and there’s just a lot of different instances. I’m obviously not parents law academic but I’m sure you can find them out there, and I think it’s something that can show you the power of having them out.
As one of apart of a component of a checklist that can maybe help you find a stock that will do better than all the others yeah exactly that’s awesome, so we ‘ve talked a lot about buying let’s talk a little bit about selling.
Andrew: ok let’s talk about it. So I did get an email from a reader andI’ll I’ll read through it real quick. So there’s some stuff in here about mutual funds versus individual value stocks I think we’ve covered that in the past. She talked about how in her example she purchased this ticker MMSI February 2016; she bothered that 1860the stocks now for the so she gained double she says.
I know the stock doesn’t have dividends which are my first mistake. She says around the same time I purchased ticker GT, it has a no-load mutual fund in April 2016 and then went out for a gain of about 20percentso she says number one it seems that mutual funds and ETFs gains grow much slower than the stock does. Why do so many advisors tell you not to purchase a good value stock over a mutual fund and she says it’s evident that the single stock made more in their portfolio than the mutual fund and then her biggest problem is when do I sell that stock? How much should I how much gain should obtain from selling it? This is where I’ve lost funds before because I held on too long.
So obviously I think a big theme of our podcast has been all about using value stocks and why that can give you better returns than an ETF. For a mutual fund, she’s asking about why the advisers don’t advise you to purchase stock and go for a fund if you’re struggling with that and want to know the answer.
Go back to our archives where we talked about the do you remember the name of that episode Dave I think it was episode six. The financial industry that the financial sector doesn’t want you to know I think yes and all of it.
Yeah but one out mainly the financial interests of many of these advisors many of the people work on Wall Street brokers all even the fund managers themselves. They don’t align necessarily with the average investor and their customers.
So if they’re financially incentivized to do to act a certain way that’s maybe not beneficial to you it only makes sense that the majority of the time that’s what’s going to happen. And that’s just kind of the way WallStreet works, so on top of that a lot of these value stocks again you can make that decision to buy a company with the margin of safety with an emphasis on the safety.
So you can get in-kind of more conservative stocks with more healthy balance sheets stocks that might not drop as much as another group of stocks that are maybe a little bit more aggressive a little bit riskier.
Also, you know you have that ability to kind of pinpoints and sniper point on something where okay well that has a really great discount. And I don’t know what the price looked at I’ve never looked at ticker MMSI, but there’s a lot of different sectors where you can kind of pinpoint on the stock and see that there’s a great discount there’s a great value, and you can swipe it up.
See that value kind of return to where it’s supposed to be, and you can get some nice gains from that. There’s also the whole dividend discussion which I ‘m sure I’ve waxed on about that before.
Check out that yeah look at the episode in our archives about the drip I think it might be episode three or four. I have a metaphor about coffee drips, and it could be a good example of why how the stock can outperform a mutual fund.
That has a lot to do with your ability to reinvest so how much should I gain how much gain should I obtain before selling it. That’s a dangerous mindset to have, and you know this idea that I’ve lost funds before because I held on too long. You have to approach it in a similar type of the way that you approach life and life you’re going to have difficult decisions most likely.
You know I mean we all like to have just straightforward comfortable small stakes kind of lives. It’s just kind of in our nature that to try this eat comfort but chances are you’re going to have decisions that are tough to make. When those types of things happen, you’re going to regret one way or the other, so you just have to make a choice and then just plow on through and try not to look behind you and try not to second-guess yourself.
When you’re talking about the stock market that’s a hundred percent sure and that’s going to be true with virtually any investment that you make. There’s just it’s impossible to be right hundred percent of the time none of us have a crystal ball there’s no way that you’re going to know really and you know Imean we’re going to miss out on opportunities all the time.
How many of us missed out on Bitcoin how many of us didn’t get into Amazon when they IPO. You can’t focus on all these what-ifs, so I missed out oh man you know they call it FOMO fear of missing out get your mind away from that and just understand that that’s just a part of life that’s just a part of the stock market.
There’s going to be a lot of you spent time thinking about what you ‘re missing out on and you focus all your energy on that, and you’re not going to have enough energy to focus on your portfolio. Your gains and to be able to have the focus to be able to find great discounts and be able to make nice profits for yourself in the sense that you know there’s always going to be someone better than you. There always going to be someone with more money than you there’s always going to be a stock that does buy than the ones that you have and you just have to let that go.
Just understand you know that’s just part of the game and then to kind of go along with that you have to understand that you’re going to have to make decisions to sell sometimes they’re going to be right sometimes they’re going to be wrong and you have to be again okay with that.
Now that doesn’t just mean that you go around willy-nilly and just say well you know c’est la vie to seize the day I’m just going to pop out. You know just do however I feel, and that’s not going to be good either because of you ‘re just rolling the dice at that point.
You need to have a strict set of systems checklists in place when you’re buying the stock. You want to have you want to have everything working for you have all the odds in your . the same thing applies to you when you’re talking about selling the stock so how can we do that what kind of checklist would I use.
Well, I’ve talked before how I split the portfolio into two parts you have the regular portfolio with a 25% trailing stop and a dividend fortress portfolio. I explained a little bit some previous emails, but I didn’t have a chance to talk about this on the podcast yet. But a big reason why this split breakdown happens you know there’s a lot of reasons, but another one that’s crucial is that you’re not going to have a dividend a real dividend opportunity long-term opportunity pop up every single month.
So you know there are be times in the market where companies and stocks with good dividend track records will trade at higher premiums than regular stocks. We’ve seen that recently and of course this is going to apply throughout individual stocks as well. So it’s not you can’t just say oh the whole market is too overvalued, but there’s just impossible to have an opportunity in the dividend grow stock at every single time.
There’s not that many I mean there’s a lot of stocks out in the stock market, and I’m able to find opportunities every single month. But there’s not enough healthy dividend grow the dividend over ten years 20years that kind of extended holding period that we’re hoping for. to get superior compounding through the dividend and through reinvesting it. That’s not going to be available at a great price every single month, so it’s nice to have that
a regular portfolio where I’m trying the more pick out and scope out individual stocks with high discounts and intrinsic value with the understanding that I might be timing it wrong.
You know you could buy a stock with a great discount, and it’s just super cheap, but it just keeps falling, and a lot of times people call that term trying to catch a falling knife and sometimes it can be because do you have a value trap. Obviously, I do everything in my power to seek to mitigate that, but also sometimes it’s just the market just wants to beat up a stock, and you could go in, and the stock continued to fall 20 30 %.
So that’s why you want to have those trailing stops in place to prevent against that and understanding that you know I’m buying the stock because I understand it’s undervalued. I don’t
necessarily want to hold it for ten 20 years, it would be nice too, and I’m you know with a trailing stop attached it could you could ride it forlet’s say 10 20 years just riding those gains up and up and up.
But you know sometimes the market doesn’t always cooperate, so you want to have that trailing stop. So I think the trailing stops if you’re going to kind of try to structure your portfolio in that way trailing stop can be used as its own just single checklist item for selling. It allows you to participate in all the upside while it gives you floor and kind of caps your downside. Which allows you more freedom to be right and wrong and kind of the same idea as diversification and-and all those types of things.
You’re putting the odds in your favor understanding that you’re not going to be a hundred percent right 100% of the time. For the dividend fortresses, the-the checklist I have is a lot more loose liberal it’s again I want to hold these long as possible and during a bear market where I might be selling out of a lot of the trailing stop positions.
I want to be continuing to hold these dividend fortresses because number one they’re going to be companies with long track records of dividend payment and increasing hopefully even through bearmarkets. so what that means is they’regonna continue to pay us that dividendthroughout a bear market and it’sactually you can look at it as it’sactuallybeneficial in that way becauseas a stock price is falling you’re gonnabe receiving that yield goes higher thatdividend yield you’re receiving goeshigher.
this the the lower that the stock falls, so let’s say you bought the stockat thirty. it goes down to twenty you’regetting that same dividend but now whenyou repurchase more shares because thestocks at twenty and seven thirty you’reable to purchase more shares with thatdividend so your yields you know you’reessentially the new shares that you’reaccumulating will have this higher yieldattached to them. and so if we’re gonnahold through bear markets that are gonnareally let us take advantage of thewhole buy and hold idea andunderstanding that these are reallystrong stocks healthy businesses longtrack records they’re going to be around
so we’re going to let themrecover with the rest of the market andwe’re going to hopefully hold them for youknow almost forever. but there are gonnabe red flags that pop up where you knowthis isn’t normal this is actuallysymptoms of a bad business.
it’s not that the markets beating it up for no reason the market is beaten up because the business is you know bleeding cash or the business model is broken or somebody a competitor’s taken over.
these are problems that you need to address and you just need to nip them in the bud.
so I have three what they are is numberone a complete cut of the dividendthis is going to be especially huge as a
red flag for a company that’s historicallyhad a great strong record of growing adividend and paying the dividend. there’stimes and I’ve seen it already with mydividend fortress where the stock doesn’t even continue growing thedividend. that’s fine, but when I talk
about complete cut that means they justno longer pay a dividend anymore andthat’s usually one of the dominoes that starts to fall and then you might see bankruptcy happen later. so you know
businesses and management and stocks they don’t want to have to cut a dividend completely because they understand the implications of that it’s signaling to the rest of the world that we are in big trouble.
so muchso that we don’t have enough profits togive out to our shareholders and it’s something they’re gonna try to avoid at all costs. so if you see it youneed to understand that this isn’t justa temporary setback, this is potentiallyyou know crippling for the business andthe stock and it’s just time to cutlosses at that point.
the second one would be a substantial increase in thedebt to equity ratio. significant meaningyou know going from something that’slike an average that the tech wa tusually the average ratio is around oneand now we could be talking about twofour six something like that like areally really extreme kind of just outof nowhere.
it’s like they’re they ‘re just piling on debt to try to stay afloat obviously going from like ten percent or 0.1 debt-to-equity to like a one that’s not that’s not terrible because now they’re just they went from like really good to just average. I’mtalking about going from maybe averageor even above average or slightly belowaverage to just a ridiculous debt equity. they’re justplaying with fire, and it’s just a houseof cards, and it’s going to collapse and youwant to make sure that you’re not theone left holding the bag in one of the those situations. so monitor the debt to equityratio.
the value trap indicator is going to automatically call for actually all three of these thevalue trap indicator does if you put inthe updated financials whenever theyrelease an annual report. that valuechart indicator is going to flag a strong sell, and you’re going to know they get out. but these are some things that areconcrete that you can keep in your mind or you can write down on a piece of paper to take notes that these three checklist items are large signals to sell.
that last one is going to be a year of negative earnings obviously againthis is similar to the first one I talked about it’s just a bad sign, a company failing to do what itsnumber-one purpose is in this life and company’s number one goal is to turn a profit.
you can talk to people theymight disagree with me, point to
different companies here and there, andtalk about how Wall Street’s rewardedthem. I don’t care I I have a veryfundamental approach; I think that abusiness at its core is there to make a
profit so it can pay you to know pay backthe shareholders in the form of adividend and so when it’s failing to dothat.
there’s just so many companies that will go through rough patches but won’t have to deal with negative earnings that there’s no reason why you should stick around for a company that does have negative earnings. it’s just bad business; it’s a bad business model, and you should stay away.
so the recap that’snumber one a complete cut of thedividend. red flag number two substantialincrease in debt to equity ratio. redflag number three a year of negativeearnings.
the red flag now as far as takingprofits apparently the trailing stop doesthat nicely for our kind of helps us getin on itclose to a high. you know if you’re doing a 25% trailing stop hopefully yourstocks appreciate it, and you’re able toget somewhere close to where the peakwas. and that’s what’s really nice aboutthe trailing stop but as far as the thedividend fortress side of it you know itif that can be more of a personaldecision. and that’s where some of yourpersonal financial goals kind of comeinto play it’s are you trying to hit aspecific net worth number where okaywell if I have several positions that are valued at X. well then maybe thatmakes more sense for me to just sell outand make those returns and those gainsguaranteed and be okay with maybemissing out on them running another twohundred thirty percent whatever that maybe.
or you could have approached kind oflike well I have where I’ve had thefortune I’ve had the I guess you call itlike that the fortune of being able tostart young. so I’m kind of looking at myretirement account as more of a income generator in the future. so you know Iwant to have these strong dividendpositions so I can use that income lateron to sustain myself and enjoy all oflife’s pleasures. travel do all thosesorts of things, so my goals might be alittle bit different in the sense that Iwant to have more so an income streamthan I do a particular net worth number.
So that’s all going to be different and personal and cater to your situation. So how you want to take profits, how many kinds of regret you want to risk if you want to call it that. It’s all going to be different, but I think one thing we can all agree on is that there are some major red flags that you want to stay away from and you want to cut your losses.
Because you know you can look at the sales page for my value chart on the Sather Research Letter, and I talked about the drawdowns and the-the effect of drawdowns and how much more money you need to make on an stock loss. It’s a big factor into your overall performance, so being able to know that number one you ‘re going to protect yourself from that and number two you’re going to have specific systems to have not only an entry point but an exit point.
I think that’s just great way to go and it’s it kind of putting all those odds in your favor and giving you the most excellent chance to do well in the market.
Dave: that was awesome dude that was a fun talk about a brain dump holy buckets Batman. Yeah, yeah that was that was great you know honestly a lot of things that Andrew was just weighing out are exactly the same things that I have for my checklist with selling.
Having the trailing stop of 25% and the three the outline for the dividend fortresses, those are all exactly the same thing and you know I think Andrew made a lot of excellent points in that, and the conversation about selling is such a hard conversation and it’s something that has not talked about enough.
People focus so much on buying and they don’t concentrate onselling and that sometimes can be like they’re the reader said she’d lost a lot. That where she’s lost a lot of money is byholding on too tight or holding on fortoo long and just having these four simple things that Andrewoutlined can help you avoid some of that. I think the mindset that he was talking about as well as not worrying about missing out and not worrying about all those other things.
It’s just keeping your head onstraight and thinking about what’simportant to you and having thesestock checklists that we’ve talked about canhelp you be so much more centered aboutwhat you’re doing. As opposed to worrying about what Johnny and Susie are doingover there it’s not about them. It’s about you it’s about what you’re doingand the money that you’re making, and thechoices that you’re making and notworrying about you know what otherpeople are doing and not worrying about missing out because we’re always going to miss out
There’s always going to be opportunities that we just we didn’t take advantage of for whatever reason, and you can’t live in the past you have to live in the now in the future.
Worry about those things because that’s what you can control you can’t control about what happened you in the past. You just can’t, and it’s gone it’s done we have to learn from it and move on and think that’s really what I have to say about that quote our friend Forest Gump.
Andrew: I think yeah I’ll call him up and see what-what stocks he recommends tomorrow. I’m sure he’d have some good ones. I don’t do cardio, so I don’t know how well that phone call will go hahaha.
Dave: perfect excellent point. All right folks well that’s going to wrap it up for our conversation about stock checklist tonight. I hope you enjoyed our little chat; I think Andrew and I both had some interesting things to say.
Stock Checklists really can make or break you as an investor and whether you have a long one like Mohnish Pabrai or whether you have a shorter one. Just having some simple things that you have as a guideline to help you make better decisions is going to make you so much of a better investor. Plus it will help save you a lot of money and also help you make a lot of money. So with out any further ado, go out there and invest with the margin of safety emphasis on safety, find some intrinsic value before you pull the trigger and without any further ado have a great week, and we’ll talk to you guys next week.
Stock market investing