Being willing to change your mind when the story changes

Share on FacebookShare on Google+Tweet about this on TwitterShare on LinkedIn

Being mid-December I thought things on the stock market front would be quiet by now. Last year December I received the motivation I needed to start this blog (which I did in February this year). The catalyst then was an event in South Africa, the firing of the then capable finance minister, to be replaced by a political appointee. This resulted in a massive devaluation in the value of the South African currency and dramatic fall in share prices. My aim then was to diversify my portfolio out of South Africa. It still is, although it is taking longer than anticipated. The currency has rebounded quite strongly and the time (and funds) are approaching.

This December has however not been any quieter. Fortunately the reason is not political, but more company specific. This has meant I have been rather busy changing parts of my portfolio, researching new stocks, and doing a bit more buying and selling than I would have liked.

Things can change quickly

My last post focused on two stocks in which I have my largest holdings. One of these is a company called Trustco, a Namibian financial services company. I have held this stock since 2010, and it has been a stellar performer, going from 35c (2.5c US) to around R3.60 (26c US) at present. I liked the story and the growth, but mostly that the value in the share was underpinned by huge tracts of land around Windhoek, the capital city, which was not being valued correctly by the market. You could have bought the whole company then for R270m, but the property alone was worth about three times that. I was so smitten by this stock that I borrowed as much as I could from my home loan in order to purchase more shares, not something I would normally recommend.

I have continued to buy more of the stock since 2010 and along with the price appreciation it has at times been over 30% of my portfolio. However, in recent weeks the results were released which while not bad had a few things I did not like, such as increased debt. There is also the fact that they are buying a diamond mine which is being bought from the CEO at an exorbitant price according to many analysts. Then there is the issue of the CEO having rather nasty battles on twitter with people criticizing the company. All these things have made me rather nervous, and I felt it prudent to sell one third of my position. For tax reasons I am loathe to sell more in this financial year as I will pay Capital Gains Tax. On the plus side I can sleep a bit better at night and have had some cash to invest.

It is also quite sad for me, as I really thought this was my ‘get rich’ stock. (I have one other one I have hopes for, so all is not lost..). But in hindsight I should have done this some time ago, it was too risky having such a high concentration in this stock, and I have replaced it with some high quality dividend paying stocks, which will certainly help me ‘get rich slowly’ if I allow them the time and have the patience to let them compound. I will not go into details now, but the majority went into three South African stocks: Woolworths (high quality retailer), Clover (high quality dairy and beverages) and Trellidor (best in market home security). I also made a small addition to a property counter I already own, Tower Property fund, which should see me obtain a yield of over 12%. All are nicely up since I bought.

Beware of anchoring

I think as investors we can get rather anchored to our ‘star performers’, thinking that past performance is an indicator of future performance. We should in fact search for stocks that have the characteristics that prevent us from selling, as it is best to leave your stocks alone to compound over time. Warren Buffett himself says his favorite holding period is ‘forever’. However, if the story changes, and the reason you hold the stock is no longer as valid, then it is better to take action sooner rather than later. Please note though that a decline in the stock price in itself is not a valid reason to sell, that may in fact be an opportunity to buy more.

Conclusion

So, I have been busy realigning my portfolio, and am delighted with some new additions to my dividend family. I am hoping that they will be with me for many years to come, but this time my mind is more open..

All that remains is to wish all readers of this site a blessed Christmas and a New Year filled with…lots of dividends!