10 Investing Lessons For Long-Term Investors

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Includes: ABBV, ATVI, BRK.A, BRK.B, BZUN, CMG, FB, FIT, HASI, JCP, MOMO, SHOP, SNAP, SPY
by: From Growth to Value
Summary

This is my 50th article for Seeking Alpha and I wanted something special to thank my readers.

All lessons are for long-term investors.

A few highlights: never sell, average up, have sympathy for your stock and manage your portfolio like a monkey.

This is my 50th article on this wonderful platform called Seeking Alpha. I enjoy writing a lot, but I take an even bigger delight reading the comments that my readers have given. They have taught me a great deal and I have certainly become a better investor because of their wise replies. I wish to thank them all and encourage every reader to comment as much as possible.

This article will hopefully provoke some comments as well. I want to write about what I think are important lessons that I have learned along my investment path. I hope some of the 'rules' I explain here are thought-provoking and lead to new insight. Otherwise these rules will probably be a useful recapitulation of what common sense prescribes, but the market with its tempting and deceiving noise can distract investors from.

1. Never buy on margin

(Source)

The first and most important advice that I want to give you if you invest for the long term (and I think you should as I will explain in rule #2) is to never buy on margin. Margin trading is expensive and it will bring your performance down. It will probably stimulate you to have more impulse buys or sells.

But, as if it were not bad enough already, it isn't only a problem of return, but also one of personal freedom. You are not in control anymore of your own portfolio if you use margin money to leverage your portfolio. If the markets drop hard, you will be forced to either add more and more cash to your account or sell stocks at a great loss. You can even go bankrupt. At the very moment you could use the money the most to add great stocks at a fire sale price, you have to sell them. Ouch!

Instead of trading on margin, dollar cost average or invest in lump sums. If you want to put your DCA on steroids, then you can follow the advice of my fellow SA contributor Reel Ken with his thought-provoking article.

2. Invest for the long term

If you only hold stocks for a short period, you will probably pay a lot of commissions, and taxes. Even if you have a cheap broker, it adds up. But besides that: how do you think you, as a small individual investor, are going to win against algorithms that can make billions of calculations while you are just starting up your computer? Only a small percentage of day traders win money, more than 90% loses money.

How about investing for a few decades? If you have picked just one great multibagger, your portfolio will be doing great, even if you have some serious losers. I have my series on multibaggers and you can read an article on Shopify (SHOP), one installment on Baozun (BZUN) and one on the Chinese social app Momo (MOMO). I also have an article in the pipeline for the fourth part in this series. If you don't want to miss the upcoming articles in that series, feel free to click on the follow button next to my name on the top of this page.

If you have a dividend paying stock, time will be on your side as well, since you can collect your dividends and accumulate more shares. Time is your best friend as an investor.

A long-term horizon also means that you don't have to follow the stock price of your shares every single day or even minute and that is such a relieve for a small investor. And it brings us to the next rule.

3. Never sell

If you invest for the long haul, you should make it easy on yourself. I know that this rule will shock some investors, but never sell a stock. I have done that in the past because of real or perceived problems for a stock. I have sold my AbbVie (ABBV) shares in May 2016, as you can read in this article. This is the return of the stock since then:

Chart ABBV data by YCharts

Even though I still think that ABBV will hit a speed bump at a given moment in the next few years because of the expiring Humira patents, I should have held on to my position. Even after a 50% drop, the price would still be above my purchase price, I can collect a nice dividend and after a few years the stock would probably recover and go up again as AbbVie's pipeline materializes. So that was a lesson for me. I have made a resolution to apply the strategy of Seeking Alpha's legendary buyandhold2012: buy and never sell a single share.

As I have already explained in my article on why you should have growth stocks: if you never sell stocks, your winners will be big positions and will dwarf your losers. And you never know what a stock can do. Look at Activision-Blizzard's (ATVI) price between mid 2009 and the beginning of 2013:

Chart ATVI data by YCharts

For four long years, Activision was flat and eventually went down and that in a period in which the market (SPY) went up by 114%, an underperformance of more than 122.5%. I think a lot of shareholders have sold this stock, especially because they were ridiculed to be a shareholder of 'such a dud', 'dead money' or 'a broken stock'. But this is Activision-Blizzard's performance from January 2013 to now:

Chart ATVI data by YCharts

Four years of lousy performance and then a sudden excellence, with a fivebagger in just four years time.

So don't panic if your stock falls hard. Especially growth stocks can have a lot of volatility. On the 25th of October in 2011, Netflix dropped 40% in one day. And still it was the biggest winner over the 2008-2016 period under Obama: it was up more than 3100%. So don't sell your stocks. It makes investing so much simpler. The only thing you should look at is if you can handle high volatility or not. I was not nervous when Baozun dropped 25% in one day, because I know it happens with growth stock, but I know that some investors would tremble just thinking about that. That is OK. The only thing you have to do is adapt your investments to your feelings and buy more stable stocks of companies that have a bigger market cap and therefore less volatility.

What a lot of investors tend to do is sell their winners and keep their losers. They have a good feeling about the winners and are afraid that the stock would go down again. They hope to get even on the losers before they sell. But you know how the proverb goes: Water the flowers, not the weeds. There is something called loss aversion, which means that investors, and people in general, tend to avoid losing above trying to win. As an investor, you are your own worst enemy. But don't give in. Also for loss aversion there is a great antidote: never sell.

4. Try to avoid the falling knife

I remember my 'falling knives period'. I saw great companies that suddenly started to go down fast, and I was eager to spend my cash on what I considered to be a good stock. So I bought too soon and had to wait for a long time to get to break even again. That can be discouraging, even if you intend to hold for the long time. If you haven't followed the markets long enough, it seems sometimes impossible that a company's stock price can go down by 20%, let alone 30% or 40%. Or maybe even 80% in a special case or a broad bear market. So if it goes down by 10% from its all-time high, you buy. You buy more at -15% and at -20%. If the stock drops by 25% you start to get nervous and if it is 40% under water, you start thinking about selling. When have held the stock for about a year or so and it goes up by 5% of its bottom, you are swift to sell, at a big loss. Of course, afterwards it goes up again, to your great frustration.

As a beginning investor, I really had to learn to hold my horses and wait to spend my money until some bottom was in. After a few years I learned to make the distinction between a very short-term decline or an issue that would take some time to resolve.

The difference: is there something substantial? Do the financial results show a decline or are they expected to and will the issue be a drag for a year or even more? Then don't buy or don't buy yet. An example is Chipotle Mexican Grill (CMG). When the virus related problems began, you could feel that the story was broken. The typical customer of Chipotle is very concerned with health and it will need a lot of time and money to win back all the lost customers.

Chart CMG data by YCharts

But there is another scenario too for a large drop. Sometimes a stock can drop because investors want to take some profits off the table after a period of high return. Then even earnings that surprise to the upside, but not enough for the very demanding investors, can cause a stock to drop.

That is the time for a long-term investor to get in or to add to his or her position. I recommended to buy more Baozun (BZUN) after the 25% drop and followed my own advice. I didn't catch the bottom, but I added to my position at $26.62. That purchase is up 31% already. I added to my Momo position at $36.63. (By the way, have I told you already that I like those goofy reverse prices? Investing should be a bit of fun too.) I bought a bit too early, since it went down to $33 and change a few days later. But even there I am up more than 3% already. And even if there would be another drop, I wouldn't mind. After all, I am in it for the long haul. Lesson: make a distinction in drops and learn to use them to our advantage: avoid the falling knife, but add to short-term falls.

5. Learn to average up

As a beginning investor, I had to learn to buy stocks that seemed to be too expensive. Because of the huge success that Warren Buffett, Charlie Munger (BRK.A) (BRK.B) have had, and the big influence that they have on a lot of investors, value investing is about as mainstream as pizza and hamburgers. I think it is one of the reasons that a lot of individual investors underperform versus the S&P 500. They buy as Buffet, but they don't have his patience and sell too early.

Don't hesitate to average up over time in great companies. Intermediate corrections are the way to go. For example: I averaged up in Facebook (FB) in December 2016, when it had fallen 10% from its previous high. Of course, this is no general rule, as it depends on the timing of your purchase. If you have just bought a stock and the whole market corrects by 10%, then you shouldn't hesitate to average down instead of averaging up.

6. Love your stocks

Love means that you forgive mistakes, minor defaults and temporary bad periods of the one you love. Love your stocks too. There was time that you believed in a company and therefor you have bought its stock. I have an Excel spreadsheet in which I keep track of my portfolio and I add why I have bought a certain stock, in just a few short sentences. If you feel bad about a certain stock, read those words again. Probably they can give you a better feeling. And if they don't, just remember that a love relation is not always roses and moonshine. Sometimes you go through difficult times, but as long as you stick together, you can come out stronger. That is also true for your stocks.

But this doesn't mean you should just accept everything. If you have been betrayed several times, you should be able to go against your own rules and stop something which has been bad for years.

7. Think as a new investor

I have learned a lot by a mental trick. I fool myself that a company is 20% more expensive than it actually is. Am I willing to pay up for the quality of the stock, yes or no? Do I think that the company has more upside than just that (imaginary) 20%? If the answers are no, you should probably think again. Think of the simple but so wise Warren Buffet advice here:

Only buy top stocks, not the mediocre because you think that their stock price is wonderful. It's better to pay up for wonderful companies which seem always to be overpriced then to collect a portfolio of garbage stocks. And don't buy on an impulse, because then you probably don't know yet how the company behind that stock is. Do your due diligence. Postpone your buying and accumulate money in the meantime. While you do that, you can learn more and more about the company and you can see if love is possible.

Keep garbage stocks out. In that way you seriously reduce your risk. Are you sure J.C. Penney (JCP) is a great stock at $4.22? I don't think so. In the last five years its EPS were negative. That doesn't even look like a fair company to me. Maybe you think there will be a turnaround, but how sure are you that JCP will still be there in the year 2037? I wouldn't bet on it.

8. The product is not the stock

It's not because you like a certain product a lot, that the stock is good. A personal example: I really like my FitBit Charge 2. I have been wearing it for almost a year now and I adore it. It also got raving reviews in the press and on almost every site that reviewed it. But I would never buy the stock, because I think the management doesn't link a good financial performance to its great product. And that is certainly visible in the stock price of Fitbit (FIT):

Chart FIT data by YCharts

Another recent example is SnapChat (SNAP). While I tried the app and didn't like it, I see that it is hugely popular among the 15 to 25 year old I know. But Snap, the holding company of SnapChat, is as dysfunctional as Fitbit. The management doesn't do what it should do: translate a popular product into a company that is profitable or is on its way to become profitable. And again, you can see the disappointment of the investors in the stock price:

Chart SNAP data by YCharts

9. Start as early as possible to buy stocks for your children

If I would have to mention one investing regret that I have, then it would be simple: that I didn't start investing earlier. My father had one stock in his portfolio, of the company that he worked for, Dow Chemicals (DOW) and he only got 80 shares per year, but what he did was: sell them every year. He got his first shares in 1972. That is 45 years ago. While DOW has had its ups and downs, those original 80 shares would be 1440 shares now because of stock splits. And the (not split-adjusted) $400 in 1972 would be worth $95,996 now, had he never sold. And that is just that first batch. Had he kept all of his stocks, he would have had about $800,000 now. But he didn't.

That background is one of the reasons that I started with the Pink Portfolio for our little girl when she was two years old.

Every month she gets $150 in stocks for a DGI portfolio. The compounding miracle of stocks will get her a nice portfolio after a few decades. If you are interested in this, I have already written seven articles in this series and more are to come.

10. Be a bit more of a monkey

(Source: psychologytoday.com)

The average monkey beats the market by 1.7% annually over a period of 45 years. So if you are underperforming the market index, get that monkey off your back and start investing like one. If you let monkeys select random stocks, they will win from fund managers and the index. As a consequence they will certainly outperform most individual investors, who only have a long-term return of 2%.

One of the main reasons is that monkeys select more smaller market cap stocks. If you give them 1000 stocks to choose from, the monkeys have statistically more small caps than mega caps. The small caps tend to outperform the mega caps and therefore the monkeys will outperform.

But the typical (individual) investor focuses on the big, often exciting or familiar, mega caps. Now, I don't think that is particularly bad, but it is not enough. I have Facebook (FB), Alphabet (GOOG) (GOOGL) and Amazon (AMZN) in my portfolio, all mega caps. But I diversify in several ways. Diversification is often talked about, but not always done.

Your return will be better if you diversify with big market cap stocks and (relatively) small market cap stocks. I have Shopify in my portfolio (market cap: $10.4B), Hannon Armstrong (HASI) ($1.2B).

I also own shares of Momo ($5.8B) and Baozun ($1.5B) and those two Chinese companies diversify my portfolio even more by going international. While in 1975 the US had 52% of the international market cap, this has decreased and is projected to decrease further:

(Source: Axa)

So don't throw a monkey wrench in your portfolio by not diversifying enough.

Don't get me wrong, though. I don't diversify in bonds or fixed income, because I am in the game for a very long time and then it is best to invest money you don't need and 100% invested in stocks. Your return will be maximized like that.

Are you afraid of smaller market cap stocks because of the volatility they bring? Just diversify enough. Take ten to twenty small caps you really believe in and don't sell them. (see lesson #3)

Conclusion

I have explained ten rules you can apply. Some will have been obvious for some readers, others maybe surprising. I am quite sure that you have your own set of rules. Feel free to write it in the comment section, we can all learn from you. I don't claim that my rules are better than yours, but they fit with my personal style of investing and actually even of living. Your life and investing will probably be different. But I am pretty sure that if you stick closely to certain rules, your return will be higher than the 2% of the average individual investor.

If you have enjoyed this article and would like to read more articles from the perspective of a long-term investor, please hit the follow button next to my name.

In the meantime: keep growing!

Disclosure: I am/we are long SHOP, BZUN, MOMO, FB, AMZN, GOOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.