We’ve all been there. You buy a stock, the story looks good, but the numbers look better. You are delighted when the share price heads in the right direction quickly.
Even better, a year later you are sitting on a huge profit. 100% or more up.
Along the way, you’ve learnt more and more about the business. And of course, you’ve heard you ought to run your winners.
So you keep holding.
The numbers turn south. But you believe in the story.
Another year later. You wish you hadn’t.
All stocks are speculative
All investment is speculation. The only difference is that some people admit it and some don’t. Gerald Loeb
The truth is, many of the best returns available in stock markets are due to temporary mispricings as a result of extreme investor behaviour.
- Mr Market gets depressed about a share, creating a value opportunity.
- Positive results generate a bandwagon effect, and a momentum opportunity.
But value and momentum are time-bound phenomena. When a share is priced too cheaply, it eventually returns to a fair valuation. When a share price trends, it eventually overextends.
You can only capture these excess returns with an exit strategy. You have to know when to sell.
So buying and holding value and momentum stocks is not an optimal strategy. In fact, it normally leads to market average returns. Their share prices often revert to the mean, or (as we’ll see below) worse.
Yes, there is an exception to the rule.
If you can identify a “quality compounder”, the kind of stock that can reinvest over very many years at high rates of return, then buying and holding makes sense.
But these stocks are rare.
Let’s illustrate some of these ideas from the ten biggest NAPS winners over a decade.
Lessons from the top 10 NAPS winners
The NAPS Portfolio has a terrific track record. At a 13% annualised capital growth rate, the portfolio has almost quadrupled in value over a decade. It’s a portfolio that has beaten every fund manager in the UK over a decade, by applying just a few simple rules.
And along the way, it’s picked its fair share of big winners - even picking a couple that almost quadrupled in a single year.
But it’s what happened after these multibaggers were sold that really…
