Philip Fisher Investing Checklist

 

To Sell or to Hold Checklist

To Sell or to Hold Checklist
http://www.bivio.com/crowriver/files/Webpages/To%20Sell%20or%20to%20Hold%20Checklist.pdf


Portfolio Management Workshop


PORTFOLIO MANAGEMENT

Portfolio Management essentially consists of the activities that help investors reach desired investment goals. It is the art of optimizing holdings and increasing the value of a portfolio. And it takes some common sense and diligence to do it successfully. At times, it even takes a little courage.

This workshop will discuss the process and the tools at your disposal to make the most of your investments. It may also suggest some answers to some of the questions you may have about when or why you should sell your stocks and what you might want to do in today's market.

How Checklists Can Help Investors

April 12 2012 

It is easy to drown in the flood of information available in the financial markets. There's always one more report to read, one more press release to peruse or one more chart to interpret. In such an environment, it's easy to get pulled off course; information intended to help you, can actually make it difficult to maintain a consistent investment process.

Unfortunately, the market rewards disciplined investing and often quickly punishes emotional, distracted or disorganized approaches. What's more, it's easy to forget discipline when things are going especially well or especially bad. And then there's just human nature – humans are fallible creatures and even the best find it difficult to remember or replicate what worked three or four years ago.

SEE: Stock-Picking Strategies 

Accordingly, investors should seek out ways to stay disciplined and methodical when it comes to researching new ideas, maintaining an existing portfolio and exiting positions. One of the best ways to achieve this is the use of checklists. Just as airline and military pilots have used checklists for decades to eliminate avoidable accidents and produce better results, so too can investors use checklists to develop better and more consistent investment behaviors. 

The Advantages of ChecklistsWords like "disciplined" and "methodical" are going to show up a few times in this article, and for good reason. A methodical and disciplined approach means that investors are considering the full range of the possibilities and risks, practicing careful due diligence and performing the detailed research that often accompanies long-term investment success. To that end, step-by-step checklists help foster, support and reinforce that step-by-step approach.

Checklists also help investors avoid lazy mistakes or short-cuts. Many investors, particularly value investors, claim that there is a wealth of information in the details and footnotes of filings like 10-Ks. That's true, but the fact remains that investors often forget to go through every step and read all of that material. They certainly may mean well, and they may even think they have done it, but it's all too easy to forget in a hectic and busy time. In other words, a checklist ensures than an investor always does what he or she intends to do. 

Checklists are also advantageous in that they leave a decision-making trail that can be modified and corrected with time. If an investment didn't work out, the investor can often see what went wrong and that may point to a necessary change in the process. Perhaps that investor ignored large insider sales or perhaps the investor failed to investigate what new products were coming out from rivals. Whatever the case may be, it can be a new item to add to the list. Just as airlines are constantly updating pilot checklists on the basis of experience (good and bad), so too should investors.

On the flip side, investors may also learn that they are being too strict or demanding; investors who see too many stocks succeed outside of their standards may need to revisit and revise those standards. If an investor can identify what works in the market, they can compare the qualities and characteristics of those stocks to the standards demanded by their checklists and see if they match appropriately.

Emotions are often the enemy of successful investors, and checklists can help sap the emotion from investment decisions. If nothing else, the methodical process of going through a checklist introduces a bit of tedium to offset those emotions and can allow a cooler head to prevail. The routine and ritual of going through a checklist can help preserve gains or avoid chasing bad ideas by not allowing investors to get carried away with momentum or hot stories.

The Disadvantages of ChecklistsWhile checklists are useful tools and this is a pro-checklist article, fairness demands that some of the downsides and disadvantages of checklists be presented as well.

For starters, checklists can feed a "paralysis by analysis" - the idea that there's always just one more piece of information to find before an investment decision can be made. This is especially true in cases where checklists have become too long or too thorough over time.
Checklists may also provide a false sense of security. Checklists are a consummate example of "garbage in, garbage out" and if investors build checklists on the basis of trivial or incorrect views of the market, the resulting investment performance will be lacking.

Lastly, checklists can be emotionally painful. It can ding the ego or pride to realize that you cannot do it all and need to rely on refreshers. Likewise, some investors love the rush that comes with investing on whim and emotion, and checklists can feel like straightjackets. Moreover, checklists eliminate some of the excuses that investors may like to use to explain losses – a consistent and methodical approach doesn't really allow for investors blaming "shorts," hedge funds or other fictional evil-doers for their losses.

Steps to Build a More Useful ChecklistAs there are so many different valid investment strategies out there, it is beyond the scope of a single article to offer the range of appropriate checklist permutations. Instead, there are some more general philosophies and approaches that can help investors create usable checklists for their own particular approach.

Above all, it is important to identify the key steps in the process and the key opportunities for a serious error. A fundamentals-based value investor, for instance, has to consider those financial footnotes, but likely has little reason to worry about chart patterns. Relying on technical analysis, though, may have to include a number of confirming or contradictory signals before coming to a final decision on a stock, while not worrying much (if at all) about the details of the company's off-balance sheet financing.

Checklists must also be brief. These are reminders and guides, not how-to manuals. Anything beyond a single page is likely to be too unwieldy to be practical, and investors are well-advised to create separate lists for separate tasks (like buying, evaluating current holdings and selling).

Physically using the checklist also seems to make a difference; printing it out and actually checking boxes seems to feed a different psychological process than just referring to a list on a screen. This, after all, is the major difference between a real checklist and the "mental checklist" that most investors claim to use. The investor has to make sure that their process demands that they

go through each step and leaves a record of doing so.

Last and not least, checklists need to be consistently evaluated and revised. When something goes wrong, identify the cause and evaluate the checklist to see if it needs revision. When something goes right, the same rules apply. Not all mistakes are preventable, but it is important to identify those that are and make sure they do not reoccur.

The Bottom LineChecklists are tools, not panaceas. If an investor can identify the aspects of an investment that indicate a possibility to outperform the market, it behooves them to make sure that they carefully evaluate every potential investment for those aspects and stay away from investments that do not have them. There is nothing sexy about checklists and most investors will find them to be tedious at first. As time goes on, though, and potential mistakes are avoided in lieu of real winners, diligent checklist-users are likely to find that this is a relatively simple and cheap means of boosting returns. 

Read more: http://www.investopedia.com/articles/basics/12/Investors-Should-Check-Out-Checklists.asp?partner=sfgate#ixzz1tPhOR0zP

The Hold Decision

Developing the Proper Mind-Set for Profitable Sales

The hold decision often results from an investor's bias toward a positive outlook on the future.  This subtle bias can persuade investors to take enormous personal, career and financial risks in pursuit of reward.

Investing in the equity market certainly requires a degree of optimism, but that upward bias must be supported by the fundamentals of the situation, by thoughtful personal judgement and by the judgement of suitable advisors.


It is appropriate for an investor to take some risks in search of the stock that doubles, if that risk is not too high relative to his personal tolerance.

Unfortunately, however, an investment broker makes a living by catering to this investor optimism, which supports the buy bias described above.  So investors lose billions  of dollars every year because of the optimism they bring to daily living.  Money is lost not only to fraudulent too-good-to-be-true, get-rich schemes, but also on the buying and holding sides of legitimate securities transactions.

To offset that tendency, proper buy timing and pricing can help reduce the pressure that inevitably surrounds the selling decision.  There is a natural tendency to fall victim to excitement and buy a stock when it is already hot.  Only the most disciplined of traders and investors consistently refuse to buy stocks on good news, on stories, or on excited rallies.  Instead they demonstrate the self-control to stay with their buy decisions based on their predetermined criteria.


So buying too high on a burst of optimism is the first source of optimism-induced losses for traders and investors.  But even greater damage results from holding onto positions because of excessive or unjustified optimism.  One major difficulty in overcoming this problem is that declining stocks occasionally do rally.  But an occasional burst of countertrend strength in a weak stock does its die-hard owners more harm than good.

The declining stock, by rallying - sometimes for several days in succession and occasionally by a nice point or more - provides positive feedback more recently and certainly more often.  Each time the stock turns up, a flicker of hope is kindled.  The major problem here is that even bad (declining) stocks have their good days (or weeks).

Not only does the daily price action in the market sometimes renew hope, there can be positive fundamental news as well.  A good quarterly earnings report or an optimistic brokerage recommendation can generate the renewal of optimism in the heart of an investor.  Every plus wiggle in the stock price, every time the price holds steady against a 15-point drop in the Dow and every good piece of news is a source of positive psychological feedback.  Anything that goes right is a vindication of personal judgement.


If the dominant path of the stock is downward, each and every cause for renewed optimism is actually a false signal.  In reality, those false signals should be viewed as uninvited distractions from the truth rather than as rays of hope.

When hope springs eternal, the investor must separate the facts of the situation from the fiction.  The separation process must include not only the real news background - what is actually true about the company and its industry versus what is rumour and hope - but also the psychological environment in which the investor has linked his state of mind with the company and its stock.  Guard against being trapped by a personal, renewed sense of optimism when hope springs eternal.

Using Charts

The best way for an investor to calibrate his state of mind against the market is to rely on stock price charts.  Aside from the great debate about the viability of technical analysis, a chart can be useful as an accurate road map of price movement history.

Without any experience in charting techniques, an investor can spot whether the stock is still in a downtrend or whether its price action has overcome negative momentum for the better.  Only rarely will it be true to say, "I am not sure, it seems to be right at the point of reversing."  If that is true, resolve to look again in a week and make a yes/no decision, refusing to take another time extension.

Above all, do not back into a non-decision by default through the insidious process that consultants called "analysis-paralysis."  The market keeps moving with or without an investor.  So do not wait open-endedly for just a little more news or technical confirmation.  There is never going to be a final answer or a point of total closure.  So exercise discipline:  make an evaluation and take action accordingly.

If a stock declines and then rallies, take note of a change in personal optimism level.  (How do you feel?)  Keep a daily notebook in which to write down the stock's price and the feelings that arise about it; then decide whether the revival of optimism for the stock is justified by the facts.  Bear in mind that when a declining stock has rallied back to a given price level, it feels better to the owner than when it had earlier fallen to that same price.  The more recent feedback creates hope while the earlier move produced fear.  Watch the emotional difference, even at the same price.

The price an investor pays for a stock can get in the way of prudent selling because it influences the willingness to sell in terms of both timing and price.  So buying well is important but only half of the transaction.  The investor also must exit skillfully.  Failure to buy well not only puts all the burden on possible net success on the exit execution, but it also colours the holder's thinking in ways that are damaging.

A change of mind soon after a buy is an ego embarrassment because it is an admission of error.  Taking a loss is a second ego blow.  So it is evident how the time and price of a badly made by render the selling decision more painful and difficult than it is on a big gainer.  So both the timing aspect of having bought late (recently) and the price aspect of having suffered a loss are dangers to the investor's financial health.

(The truth is that when it is time to sell before the price goes down, it is time for everyone to sell, no matter what the timing is or what the cost at entry.  But human nature seemingly demands that investors factor into the sell decision the stock's initial price.  And the less time the stock has been held, the less the investor is willing to switch mental gears and say "sell.")

What should determine the decision is whether the stock seems likely to go down from here and now; if it does, it should be sold as soon as possible.  The central question that should decide the hold/sell dilemma is "Would I buy this stock today?"  Many investors fail to ask that question at all.

There is no denying that buying better helps most investors cash in more effectively when the right time comes.  Most buying mistakes (aside from acquiring inflated "hot" new issues and penny stocks) occur not in buying bad stocks but in buying mediocre stocks too late - again, because investors tend to be crowd followers.  They wait for confirmation because they need courage.  They are most ready to jump in when the market has already become overbought.

If a stock is held only because of perceived positive potentials for the whole market, it should be sold.  "Would I buy today?"  A similarly revealing question is whether an investor would sell it here if he had bought better.  If there is even a hint of an affirmative answer, he must recognise that cashing in is the right thing to do.

20 Questions to Focus the Hold versus Sell Decision

Key to Investment Success
20 Questions to focus the hold versus sell decision
http://spreadsheets.google.com/pub?key=txuLCrK4TZX_7uR7KDlLE7A&output=html