While analyzing the results of one of these companies in our portfolio, I asked myself these questions:
“How long does it take before we say, ‘enough is enough’ ”?
“Should we sell a stock that has done nothing as soon as we have owned it for two, three, five years?”
The reflection made me think of the entrepreneur who launched his business and who is still having trouble making a profit after two, three, or even five years. When should he face the facts and give up before he is forced to do so?
Here I allow myself another example from the world of tennis. It is notoriously difficult to crack the world top 100 in tennis. However, the majority of players who do not reach this level will have difficulty self-financing their career. When should a player whose ranking is near the top 100 conclude that he has come to the end of his journey and that a career change is in order?
In short, when does patience become stubbornness?
Personally, I have a lot of difficulty with recipes that we apply without thinking, automatically. I know, for example, that many investors place stop-loss orders for the stocks they hold in their portfolio. Others will set themselves the goal of selling a stock that has done nothing for two or three years.
Instead, I recommend analyzing each situation on a case-by-case basis.
Here are two convincing examples from the stocks in our portfolios under management.
The first is Stantec. We acquired our first shares of this Canadian engineering services company in early 2015 for approximately $32 per share. However, in October 2019, more than four and a half years later, the stock was only worth $28. A policy of selling a stock that did not deliver the goods after two or three years would undoubtedly have forced us to sell the stock. It would have been a costly mistake: from the end of 2019, the stock began a strong rise which took it to more than $110 today. Despite its very slow start out of the blocks, the stock has given us a compound annual return of nearly 14.7% since our initial purchase, without considering dividends received during the period.
The other example is Cencora, which was called AmerisourceBergen when we initially purchased the stock in late 2017 for around $82. The company is a distributor of pharmaceutical and medical products in North America. As of early 2020, more than two years later, the stock was still worth around $82. Was this a good reason to sell it? Obviously, no: its price today is almost $238. Without considering dividends, the stock gave us a compound annual return of around 36%.
These two examples lead me to believe that we must analyze each situation specifically, without applying a ready-made recipe.
Before buying any stock in our portfolios, we establish a buy scenario of a few lines, which summarizes the most important factors underlying our decision to buy.
For example, in 2017, we wrote into our buy scenario for AmerisourceBergen that we believed its stock valuation was depressed due to concerns that Amazon would become a strong competitor in medical distribution. We also concluded that the market for drugs and medical products would be difficult to sell directly to consumers. Had this scenario changed two years later, even if its stock was floundering? No. And the company’s profits continued to increase during the period.
In short, I believe that it is healthy and productive to question one’s portfolio stocks regularly, especially those that have not delivered the expected goods. But selling automatically is a mistake that could prove costly. When a stock stalls on the stock market for a while, I recommend patience, as long as the reasons that motivated our initial purchase are valid.
On this subject, I suggest another of my blogs which deals with patience towards one’s stocks (in French only): Une patience à deux vitesses.
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