Bill1703
15 Oct 2017
Re: Remarkably expensive "It seems lazy and self indulgent to continue to hold something merely because it has done well for you in the past... the fact of its having done well in the past is not ipso facto a justification for hanging on to it, especially if there are reasons to believe that its best days are behind it..."Yes, LKH, you are right of course - in terms of investment decision-making at its purest. And it stands as excellent advice to any investor... no matter how experienced.When I say "good reasons" for holding on, I really meant "understandable reasons - not all of them good". A lot of it is to do with the psychology of investment, and the skewed perception that can create... but then, investment is a very psychological process, as is increasingly understood (and they are now handing out Nobel prizes for pointing out, no matter how bleedingly obvious it's been to some of us for a while).But it's not entirely to do with the psychology, there is at least some rationale in the cold, hard maths of investment returns. You buy RB 10 years ago at £25... and you work out, when it hits £81 (a mere few weeks ago), you have "made" 225% - a CAGR of 12.5%, with divis on top - wonderful stuff! Undeniably, an excellent investment. But then it falls to £67, in the blink of an eye (relatively speaking)... your CAGR is now showing 10.4%. Doesn't make it a bad investment... still pretty good, you've merely paid the opportunity cost of not selling out at £81.And opportunity cost is merely that, it's a hypothetical - you could have sold at £81 and then put it all into some munter (eg. see Woody's latest portfolio list?) and lost a lot more than the relatively small further gain that your opportunity cost has foregone.But, you are an excitable new investor and buy into RB - and the "only going one way" hype - at £81, then you are looking at a negative return of 17% in just four months (FWIW a CAGR of more than minus 50%!) No two ways about it... that is a BAD investment. Albeit only a snapshot in time, and the stock has recovered somewhat since... although it's still well down.There is a world of difference between these two investment realities - not just perceptions - for the same stock, at the same SP. So I would say, it is a somewhat different investment decision - where you already have substantial long term "gains", to give some of it up in opportunity cost, when it will still (most likely) leave you with a "good" long term investment - compared to buying into a new stock for the first time. But that aside - your starting argument still serves as generally sound advice on dispassionate investment discipline... I will make sure I include it in my book, when I get around to writing it...
LK Hyman
15 Oct 2017
Re: Remarkably expensive Bill,"as I've said many times, I can see good reasons for continuing to hold such stocks when they have done so well for you in the past - but should you actually buy in at these levels!?"It seems lazy and self indulgent to continue to hold something merely because it has done well for you in the past. Surely the only thing that matters is what is likely to happen to the share price in future?Whether you have held a shedload of RB (or ULVR or DGE) shares since its creation in 1999 or you have an equally large number of klebbies in cash, it should make no difference to whether you keep the RB, keep the cash or sell the RB or use the cash to buy something else.I tend to agree with your implication that many people will in practice tend to hold a share that has done well in the past but the fact of its having done well in the past is not ipso facto a justification for hanging on to it, especially if there are reasons to believe that its best days are behind it.Sorry if I'm stating the bleeding obvious.LKH on the flybridge
Bill1703
15 Oct 2017
Re: Remarkably expensive "Er, no, not based on long term experience. Historically, what goes up will carry on going up. If you look at the Dow since 1900, it's gone up by over 10% a year compound even if there have been some long red episodes, and the FTSE rather less (Reckitt and Colman/Benkiser probably by rather more)... Patience, patience, it will pay off if you steer clear of munters."picstloup - er, yes... and no! As I arguably should have made clear in the original post - but did subsequently clarify in my most recent one - I was talking here NOT about absolute share prices, but stock valuations... specifically P/E ratings, though it also holds true for other metrics.Share prices do rise inexorably over time - albeit typically, as you say, with often lengthy "down" periods - but P/E ratings do NOT, they tend (on average) to cycle back and forward around a long term "mean". THAT is the true lesson of long term experience. Some stocks manage to escape such "mean reversion", by virtue of a sustained long term secular growth record, but - again, over the true "long term" - these tend to be relatively rare exceptions that prove the rule, and are most often small cap stocks that make the grade into larger ones. You won't find many such exceptions among already-huge mega-cap 'blue chips'.As you say there are munters to be avoided... and these include the many that litter the corporate graveyard, sometime high-flyers that have their day in the sun - and achieve huge valuation ratings - only to come crashing back, never to return. I certainly wouldn't say that is what we have here with RB (or a DGE, or a ULVR) ... but equally, high valuations tend to presage lower future returns, even into the long term.Buying a stock like RB at what proves to be a cyclically top-end valuation is very unlikely to ruin you - if you are patient, overall returns will still probably be okay in the end, but they will often add up to underwhelming compared to returns available elsewhere, for many other stocks and perhaps against the market average too. So this is what I am talking here... as I've said many times, I can see good reasons for continuing to hold such stocks when they have done so well for you in the past - but should you actually buy in at these levels!? For a new investor buying in today, it could require patience indeed - a quality that fewer investors truly possess than ought to be so - before they can point to the supreme returns that someone who has held them for the past 10 years or more can already claim.And FWIW, consistent with my recent posts - this investment equation is far less clear cut for RB at £72 as it is, say, for a DGE at £26 or a ULVR at £45, for all the reasons we've been through ad nauseam. Though it probably did hold comparably true when we were up at £81, just a few weeks ago... all IMHO of course, as it always will be!
gamesinvestor
15 Oct 2017
Re: Remarkably expensive ""as they're now £14, and profits appear at last to be moving up after a long flat-lining,and the dozy CEO is finally heading for the door.""picts - looks like you have the classic example of a company that holds up when being run by an eejit -- as they say -- "they all will be at some point" -- well for now at least.Pearson was not so lucky I fear -- unless magically they turn around their digital educational business.Games - Smith and Nephew's shares jumped on the speculation that an activist investor is building a stake -- I won't be following them as it's artificially pumped because of this action. S&N's borrowings are still rising faster than the business and the NHS is rationing now.
picstloup
14 Oct 2017
Re: Remarkably expensive It's not just the laws of mean reversion that investors need to worry about - it's the laws of gravity! What goes up, WILL come down... we are all of us only arguing over the timing... says Bill__________ _______Er, no, not based on long term experience. Historically, what goes up will carry on going up. If you look at the Dow since 1900, it's gone up by over 10% a year compound even if there have been some long red episodes, and the FTSE rather less (Reckitt and Colman/Benkiser probably by rather more). In the short/medium term, stocks will come down before going back up again. Games and I briefly discussed the possible overvaluation of Smith and Nephew ("massively overpriced" was his headline) earlier this year. Games estimated its true value at £5 (c£12 at the time) with speculation of a possible takeover being the reason it was so much more. I'm glad I held on (as I have with Diageo, somewhat against my instincts), as they're now £14, and profits appear at last to be moving up after a long flat-lining,and the dozy CEO is finally heading for the door.Patience, patience, it will pay off if you steer clear of munters.
