Value investor with a deep passion for understanding and a desire to improve results over time.
So you've built up your stock portfolio, and now you're maintaining the garden of companies you own. You understand the value of cash and how to keep it on hand, and the value of diversification means that not all of your stocks will crash at the same time (hopefully), so you can sell the ones that are up to buy more of the ones that are down: value investing 101. However, there's another angle to the whole portfolio management thing that you might want to consider, and this one concept might help you as much as any other overarching investing concept: you need to think like a merchant, offering the public what they want to buy.
The Cola Salesman
During his childhood during the 1930s, Warren Buffett famously sold soda in order to make money. In order to maximize his pre-pubescent profits, the young Oracle decided to conduct some prudent market research by collecting bottlecaps adults had discarded, and counting them by soda type. Once Buffett concluded which sodas were most popular, he knew which ones to sell, and in what quantities.
This sort of logic is pretty straightforward when it applies to physical goods for sale. After all, it is relatively obvious that not everyone likes Coke as much as they like Dr. Pepper, and some people might have dietary restrictions allowing them to purchase a Diet Coke, but not a sugary drink. The same principle applies to your own stock portfolio, particularly if you're applying fish jump logic.
Quick Aside and Caveat
If you're 100% a buy-and-hold investor, you can stop reading now. I'm sorry to have wasted your time, and I hope that you get to meet Ben Graham one day in the afterlife. My personal preference is to be comfortable holding for the long term, but also staying opportunistic for mispricings in my favor. In other words, I want to sell what I own as soon as the price is so expensive that it might be risky for me to own it at today's levels, or as soon as there's a better opportunity out there. If you are capable of changing mental lanes like this, you can benefit from both the ultra-patient approach, and terribly high price spikes that benefit you from time to time.
Think about your portfolio in the same way you might think of your soda merchant's refrigerator. Imagine you have space for 100 sodas in your fridge, and ask yourself some good questions:
- Is it best to have 100 Coca Colas, since that's the most popular drink, or is it better to have an equal number of each?
- If an equal number isn't ideal, what ratio would sell the most soda, the quickest?
- How quickly can you replace the cans or bottles in the fridge? If you're selling soda today, can you order more soda to replace the ones you've sold today, or is there a delay?
These questions apply equally to a stock market portfolio. You're literally a merchant, but you don't have to sell stocks every day (or week, or month, or year). Instead, you can wait for Mr. Market to offer you the right price. However, you're still selling a product that other people want, and the laws of supply and demand work exactly the same in both scenarios.
The Supplemental Approach
While I prefer to buy stocks that are selling below the business's intrinsic value, with strong business fundamentals, I've also taken notice of stocks I understand well enough to trade. It's important to me to be able to hold in case there's not an opportunity to sell, so I need to feel comfortable enough to hold for the long term if necessary. However, there may be a huge short-term opportunity to sell for higher than its value, and those are the moments when very high returns can be achieved.
This eye for the markets can be a great supplement to a true north, a great bolt-on acquisition to your intelligent investing process. It's risky to try to only think like a merchant, without using any sort of fundamental analysis, but if you can use the merchant concept in tandem with other best practices, and stay consistent, you can truly improve your returns in both the short and long term.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2022 Andrew Smith