Once you’ve found that bril­liant share, don’t sell

So you’ve man­aged to find a great share that is per­form­ing well. It is vi­tal that you keep your cool and hold on to it de­spite the mar­ket’s ups and downs.

Finweek English Edition - - Marketplace Invest Diy - By Si­mon Brown ed­i­to­rial@fin­week.co.za *fin­week

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’ been post­ing 20-year charts of some lo­cally listed stocks on Twit­ter. The re­turns have been awe­some. Naspers* is up from R4.50 to R2 815. Capitec** grew from R2 at list­ing in 2002 to R852. PSG’s share price is up from R4.40 to R260. Th­ese are just some of the bet­ter ex­am­ples of stocks gen­er­at­ing mas­sive re­turns over the past two decades. There are of course also the down­side stocks, such as PPC, which was R6.50 in 1997 and now trades be­low R4 af­ter reach­ing R53 in 2007.

The com­ments about the win­ners were all pretty much the same: “We wish we could go back in time and buy those stocks in 1997!” Now of course that isn’t pos­si­ble. So we have to try and find the next shares that will be the mon­ster movers be­tween now un­til 2037. It’s hard, but not im­pos­si­ble.

An im­por­tant point is that a few peo­ple com­mented that the last two decades were a golden age of in­vest­ing and that th­ese re­turns are not likely to hap­pen again. That’s not true; there will al­ways be big win­ners in the stock mar­ket re­gard­less of what’s hap­pen­ing. We just need to find them.

The first im­por­tant les­son is to exit the losers. Even though we will sel­dom (if ever) exit at the top, PPC is an ex­am­ple of how bad things can get. Sell­ing the losers is al­most as im­por­tant as hold­ing the win­ners. I say al­most, be­cause a loser can only ever cost 100% at worst, while win­ners can gen­er­ate many times 100% in gains. But we still need to get out when things go wrong.

Re­gard­ing those win­ning stocks – let’s deal with the sec­ond part first, hold­ing on. Find­ing the next mas­sive win­ner is hard. Very hard. But the even big­ger chal­lenge is hold­ing on to that win­ner. If you’d bought Naspers at, say, R50, what would you have done at R100? And at R1 000? Sold and taken your prof­its? That would have made per­fect sense, ex­cept you’d have missed most of the real re­turn. We have a fear of miss­ing out and that makes us buy bad stocks. But it also makes us sell great stocks as we want to lock in the gain and get a sense of ac­com­plish­ment.

But we need to let the win­ners run and hold on even when they re­verse, if the story re­mains com­pelling. We shouldn’t get de­spon­dent dur­ing the tough times. As I have writ­ten be­fore, we need to know why we hold the stock and what at­tracted us to it. And if the story and fun­da­men­tals re­main in­tact, the price is less of an is­sue as it will catch up to the story in time. Over a 20-year hold­ing pe­riod, mar­kets will crash and rise, but we need to ig­nore the noise and hold on tight. All the above­men­tioned stocks were worth hold­ing through the bear mar­ket of 2001 and again dur­ing the global fi­nan­cial cri­sis of 2008/09. In both cases they lost a large chunk of their mar­ket value, but as great com­pa­nies they sur­vived and when mar­kets im­proved, they con­tin­ued their runs.

Hold­ing when times are tough takes courage, but it is made eas­ier for me when I remember that I have time on my side. My favourite trick is to ask my­self where I see this com­pany when I am 65 years old and hit­ting re­tire­ment. Will it still be dom­i­nant? Will its prod­ucts or ser­vices still be needed? I find that do­ing this re­ally helps put the cur­rent story and price into per­spec­tive and helps me hold on dur­ing tougher times and re­sist the temp­ta­tion to sell.

I will tackle how to find th­ese win­ners in a fu­ture col­umn. ■

My favourite trick is to ask my­self where I see this com­pany when I am 65 years old and hit­ting re­tire­ment. Will it still be dom­i­nant? Will its prod­ucts or ser­vices still be needed?

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