Business

Will you accept this rose?

The Sterling Report

By Yanique Leiba-Ebanks

Sunday, December 09, 2018

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Professionals, amateurs, novices and self-proclaimed experts alike sometimes agonise over their stock selections. The best information and analysis don't necessarily correspond to the best performing stocks from year to year.

Pick me, pick me!

Everyone wants you to pick their stock for your portfolio. In that respect, picking stocks can be likened to contestants on The Bachelor, each stock hoping to get the coveted rose! However, apart from the macro and technical analysis, there are other factors to bear in mind when building out your portfolio.

KEEPING THINGS IN CONTEXT

You may have enjoyed success in the past, whether you are a professional or an amateur, and hopefully you are still enjoying that same success. However, be very mindful of the expression “a rising tide lifts all boats”. This simply means that if the stock market is doing very well (a bull market), more than likely almost all the stocks will do well.

So, everyone is probably feeling good about the success of their portfolio and may mistakenly attribute their success to their skill.

Likewise, in a bear market (when everything is plunging), even so-called good stocks are likely to perform badly.

TIMING IS EVERYTHING

The largest success stories tend to go as follows, the individual bought the stock of a company that they thought had very good growth potential. At the time of the purchase, the market was “meh”, yup that's a term! I'm kidding, it is not a financial term, but the point is that the market was kind of flat.

That individual had a long-term horizon, held the stock and when the markets went back up, they made a killing! Typically, a few 100 per cent increase.

The key takeaways here though are: investing before the market takes off and being patient (holding for the medium to long term).

IRRATIONAL EXUBERANCE

When the market is doing exceptionally well, there is a tendency to buy stocks for buying sake. The rationale given is that everyone is going to rush it and the price will go up.

This may be true, until it is not. As Warren Buffet says: “If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes.”

The issue is that the market can “turn on you” very rapidly. Another Warren Buffet quote says, “You only find out who is swimming naked when the tide goes out.” So please don't shortcut your due diligence process, it still makes sense to carefully analyse each new investment. Never mind the “noise”.

DEAL BREAKERS

There are many deal breakers when it comes to stock picking. One such one is the presence of dishonest principals. This may not be an issue for everyone, but if the company is later found to have had dubious business practices, you cannot act surprised.

Your own gut may be steering you away from a company, but you may be having problems articulating your objections to the investment. That too is okay, even if you can't explain it, it is okay to say no. Your moral code is a huge one, some shareholders refuse to invest in companies that support gambling, alcohol, or cigarettes. This is entirely up to you.

However, the biggest deal breaker should be investing in something that you truly do not understand, and moreover, if you find that no one else (including your broker) understands the deal or investment, then stay far.

This is not the time to pretend to be smart, because many times, people may seek to disguise a bad deal under several layers of complexity. If you find you genuinely are not understanding what the documents are saying, just say no.

Finally, you are ready to give your rose to the investment of your choice. Rest easy, knowing that you have done your due diligence, you have analysed whether the stock market is in a bull/bear or meh state, and you are prepared for the bud to reach full bloom.

Happy investing!

Yanique Leiba-Ebanks, CFA, FRM is the AVP, Pensions & Portfolio Investments at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at info@sterlingasset.net.jm


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