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If you are in the market, price volatility is something you learn to live with. Of course, you would be happy if prices go up. But what happens when it goes down?

If you are a trader, you have a stop loss to help you manage a price decline. But if you are a fundamental investor, a stop loss is not going to help.

I am a long-term value investor and they all tell you not to worry about price decline if it is a temporary volatility issue. But how do you tell that it is a temporary issue?

I had to come up with my own decision framework to handle price declines as summarize by the decision framework below. I hope it helps you.



If you want to see how I have used it, read about it in Parkson Holdings - how to handle a price decline

As fundamental investors, I feel one fatal flaw is our tendency to keep holding onto the numbers and then also trusting them to blind faith. It is like the man with a hammer syndrome.

For Decision 1 ("Is there a margin of safety?"), I found out that markets are often forward looking and at most times, market prices (anticipation of the future) are lower than calculated intrinsic values (which is calculated based on historical performance).

For Decision 2 ("Would you buy at current prices?"), it is a bit tricky because it involves asset allocation as well, ie. how much the stock already occupies in your portfolio. If the earlier position sizing wasn't done correctly, it gets even more complicated.

Generally, in order to reduce "man with a hammer syndrome", I will be writing down the sale reasons whenever the stock is first purchased. So there is always a dose of qualitative mixed with quantitative in the decision making.

Thanks ivalue for your kind sharing.  I checked out your PHB market operations and it was very well written. 

Question: are you still holding on to PHB?

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I trained myself to buy only those stocks that goes up. I hope to avoid averaging down as far as possible. For a very simple reason, what if I'm wrong?

It's true that if you identified a good stocks and it goes below you're buying price, then it simply implies that there are better margin of safety (MOS) aka better value.

Buying more would be the logical answer

The only thing that stopped me to buy more is the question: 
What if I'm wrong?

I never think that I'm smarter or better at analysing stocks or evaluating an opportunities.  

In fact, I think that I'm exactly opposite.  I'm clear what I'm good at, where my strength lies and what I enjoyed doing. 

Hence, I trained myself very hard to only buy stocks that goes up.  If it does not go up, don't buy. 

Because of this, when a stock that I brought dropped, I know that I'm wrong.

What do you think?

Gratitude!

Yes, I am still holding onto Parkson. I folllowed my analysis

Thank you ivalue for your kind sharing.

I echoed that one should follow their own analysis (and their unique circumstances too).

In fact, I took investing as a hobby.  This hobby allowed me to learn and experience many exotic happenings that I would not never dream of.  

Buying Citibank below USD3 would be one instance.  

Because everyone of us are unique and hence I think there are no one size fit all scenario in investing and we should/must understand/accept/respect each other choices. 
Nothing right or wrong - so long as what we are doing is within legal (and moral) limit.

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Feel chatty today and just wanted to share my sell rules - selling to my sleeping point.

First of all, there are many sell rules and those to me are very good advise and I try to use them (including your diagram) too.

The problem is there are too many sell rules and it's sometime (to some people usually) contradicting each other.  

At the end of the day, the #1 sell rule which suit me is "Selling to my sleeping point". 

BWL was very much loved (or hated based on current vb.com sentiments).

In fact, just before selling, BWL was occupying more than 35% of my entire stock portfolio.  That's says how much I loved BWL.

However, with the un-settling China saga, I decided to sell on a Sunday night aka I can't sleep bro. 

The next morning, I look at the buy/sell Q and punched in my sell order (next few Sell Q).

At 9:30am, I noticed that none of my sell order was hit.  

There and then, I made up my mind and removed the series of Sell Q and immediately placed a market order.

As what every says - the rest is history.

I sleep like a baby every night. 

Gratitude!

If you read the stories of successful value investor, they all say that selling is more difficult than buying when prices are going up. I invest in brick-and-mortar" companies and my rule of thumb is to get out completely when the price is double the book value. But I have had missed opportunities before when prices when higher after I have sold all.

Of course selling for profits is an easier thing compared to figuring out whether to exit when prices have fallen. My selling framework is for this falling price situation. I have not go one when prices are rising.

Thanks i4values for your sharing.

Allow me to share a once favourite 'Brick-and-Mortar' company loved by vb.com - Micro Mechanics Holdings (MMH).

I started accumulating MMH when it was about SGD0.40. My purchase price was above its NTA (and all subsequent purchase too).

At that time, MMH was not well-known. It was a cyclical stocks and generally perceived as capital intensive and no visibly moat.

The share price steadily increased to SGD0.75 and one financial blogger that I followed closely attempted to valuate MMH and the conclusion was fully valued.

Then, the share price steadily increased to SGD1.50 and another financial blogger that I followed closely (I like to read these blogs as it's part of my hobby), valuated MMH and again the conclusion was fully valued.

Subsequently, there were some postings (here and there) that mentioned selling too fast etc.

The standard script always says that they wanted to buy back MMH. 

Being a cyclical stocks, MMH had went thru it's peak at SGD4.00 and it's on it's down cycle at SGD1.67 last friday.  I doubt and will be very surprised that SGD1.67 is it's lowest point of current down cycle (thou I might be wrong).  I am just wondering, those value buddies that wanted to buy back MMH - are they polishing up their gun? 

For me, I sold about 25% of MMH at about SGD4.00 and no regrets selling. It was a really nice selling experience and I can tell you that the buyer comes from all sought of financial institutions - local and those international firms.  I wonder why so diverse group of buyer for MMH at SGD4.0.  I cracked my head and still do know why. 

Gratitude!

There are many types of investors. You are thinking like a fundamental investor. But there are momentum and other technical investors and in many cases, these are the ones pushing prices beyond the fundamental value. And of course there are also the speculators who jump in when they see prices going up. Good for you to have held on for so long.

Agreed and thank you i4value for your reply.

There are many type of people and I'm still learning to be a value investor.  

I'm terrible at valuating a business.  I felt that valuation is more an art than a science.  I will try to spend some time this coming Eid Al-Adha reading your book.

Since I'm not able to value a business (accurately), what I did was to leverage on our guru.  Let me share an example  on how I leverage on guru using "THE" hottest stock in vb.com - Penguin International Limited (PIL).

For many years, valuebuddies had provided detail analysis of of PIL.  As there are multiple people providing different analysis, it gives me a sufficient reason to take PIL seriously (as an investment opportunity).

When I noticed that some valuebuddies wrote that their investment was out of money, I started to track PIL stock price closely and of course, it's downward trend.  The result of PIL was not good and the price momentum was set and going downward is the only way forward.

Then someone mentioned that the results (Q1 and Q2) was turning around and I did noticed the turning around of PIL stock price.

At that time, I could start to buy or exercise more patient for the Q3 result to be released.

I told myself to be patient and that 2 weeks of waiting was really gruesome. One one hand, PIL stock price was inching up and one the other hand, I need to be absolutely sure that PIL is turning around.

Well, as what they says, the rest is history.  Q3 result is even better than Q1 and Q2.  Based on these 3Qtr result, I extrapolate and formed my opinion on the FY result and initiated my market operation #1 on PIL.

This #1 operation ended with about 100% gain as I felt that a lot of people is buying PIL and I just sold out when the market is hot.

Then, PIL tighten it's dividend and spending a lot of $$$ in expanding it's business.  Because of this (and other unknown reason), the stock price drifted downward again.

Again, vb.com acted as a great source for me to gauge the interest for PIL (as at that time, PIL had emerged as our hot favourite). 

Price down trend continue for a few Qtr and when it's closer to the entry price of my first market operation, I began market operation #2.  

Shortly, PIL announced it's first buy-back exercise and I surrendered my script with heart full of gratitude. 

The result of #2 was about 80% gain and I told myself to wait out and look out for operation #3.

However, #3 did not take place as recently I was occupied by something else more important. 

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@i4value - I'm very grateful of your teaching and I had skimmed thru your book yesterday and I hope to learn more fundamental analysis and value investing from your generous sharing.

Gratitude!

The sad part about value or any fundamental investing is that it rely on business analysis. So if you don't have a business background, you can be intimidated. One way around this is to look at what others have done. That is why sites like The Motley Fool or Seeking Alpha are useful. But there is no substitute for learning how to do your own analysis. The stock market is a zero sum game and if you want to beat the crowd, you have to do things differently from the crowd. Getting info from site that many others have access to is not a winning formula today.