My Answer To – How Do You Fight Yourself From Selling?

Value Investing Journey is dedicated to developing the world’s best value investors. In that vein, I occasionally answer questions related to value investing, finance, learning, mental models, etc., on Q&A site Quora. I hope you enjoy the question above and answer below.

Below is an answer I wrote on Quora to the above question. The question and answer are important to how we all learn our craft of value investing so I’ve decided to post it here as well.

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Great question.

Almost everyone focuses on how to buy a stock or investment… Very few think about the selling process which is the far more interesting of the two.

When you buy an investment you know it inside and out. You’ve valued the business. You’ve evaluated its competition. You’ve learned enough to trust it managers, etc… Or these are the things you should be doing before you buy at least.

You’re happy for a while, but then something begins to change.

You don’t know why, but all a sudden your perfect investment you spent 100s of hours researching is down 50% and you’re freaking out.

What should you do?

I’ve been there in the past and I know if you’re invested in the stock market for any length of time, you will face this same situation.

So how do you deal with it?

By doing two things…

1. Taking emotion out of the equation as much as possible with data and the other information and notes you took while researching the investment
2. Training yourself to get rid of as much emotion as possible

Neither of these are freak out like most people – or even the news does -about everything.

I used to freak out in the past too when a stock I owned dropped a lot for little to no reason… At least publicly known reasons.

And that’s why I came up with the following process that helps me whenever I feel emotions playing with my stock decisions.

I go back and read all my notes, valuations, research, and recommendation article. If I buy a company, I always write down my investment thesis – to see if anything changed from when I bought. Or if there is some kind of new information or info I missed before I bought them.

If nothing has changed, and I can’t spot any material mistakes I made in the analysis, I move to #2 above.

Quick note before we move on to that though…

Every value investor I talk to or teach that asks me about the buying / selling process, I highly recommend to them that they write down their investment thesis.

Not only does this bring clarity to your thoughts and help you spot potential errors in your thinking before you buy, but it also allows you to go back in times of distress to reread your initial investment thesis and reason for buying the investment.

This allows you to go through the process I mentioned above without having to rely on our faulty memories.

And this allows you to take emotions out of play with data and information.

Now back to #2 above…

How do you train yourself to take emotions out of things?

I can only speak for me on this since this is a very personal question unique to every investor out there. But what works for me are the following things.

• I don’t watch any financial news at all
• I rarely read financial newspapers or magazines either

Not doing the above two things keeps emotion – which is what these two things are based on – out of the equation because I don’t see things like “Biggest Crash Since XYZ” or “XYZ stock Dropped like a rock.”

None of this is important unless it changes the underlying economics of the company or brings new info to light.

• I check stock prices and news on the companies I own maybe once every 2 weeks

I do this to help me focus on the long term, not intraday or intraweek ups and downs.

• Unless some kind of major news / development / contract comes out afterward, I pay almost zero attention to the companies I own.

Why?

Because generally, I buy good to great businesses that produce great profits and cash flow and have extremely healthy balance sheets – little or no debt compared to a ton of cash.

I don’t need to watch these kinds of investments other than to make sure managers are still doing a great job, the economics of the business aren’t changing, and nothing major bad happens.

Other than that, unless I find something new and better to buy, I hold these companies for as long as I can and wait for their value to compound. Or until they get bought out which has happened to many investments I’ve owned.

How extreme is this entire process for me?

Well, one day last year, I checked the stocks I owned for the first time in a while – don’t remember how long – and saw that its stock price was up more than 400% – or a 4X – to what I bought it at.

I had no idea until then it had gone up so much.

The above things also keep your emotions out of the way when a stock you own rises a lot as well and you wonder if you should sell or not.

I hope this helps you.

In terms of growth stocks, yes and no.

I own companies that I expect to do well into the future, but I don’t bank on that for any of the companies I own in the portfolios I manage.

Everything I expect in the future is just icing on the cake to me if its positive.

If not, I always buy undervalued assets so I have a gigantic margin of safety when I buy.

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