If we bought a stock, it means:
- Our in-depth research showed it to be a high-quality business
- We couldn’t “kill” the business (i.e., we think it’ll survive the worst case scenario)
- It’s at a good price after given our valuation and accounting for potential risks and a large safety margin
We put businesses we couldn’t kill but that are too highly priced on a waiting list until they reach our target price.
Purchasing a stock is just the beginning for us. We continue to further reduce your risk of investing in the new purchase through the next two steps of the investment process.
We treat purchased stocks as if we were looking at them for the first time.
We continue to research the company, build and update our models, and try to “kill” the business. If new information causes us to revalue the stock, we make sure it’s still a good investment for your portfolio.
And we sell the stock with no hesitation if new research shows that it’s no longer a great investment.
We then sell for one of 3 reasons:
- A stock reached its full potential.
Since stock valuation is more art than science, we avoid emotional decisions by selling half once it reaches the bottom of our target range, and the other half when it crosses the top of the range.
- We found a better stock (that offers higher risk-adjusted returns).
- Something went wrong.
We continuously re-evaluate our portfolio. If we discover that the assumptions in our valuation of the business were off (or something unexpected happened) such that it’s no longer a good purchase, we get rid of it without hesitation.