As soon as my ad was posted, I received several messages from interested buyers. Within five minutes, I had received no fewer than 20 inquiries. I was overwhelmed and didn’t know who to respond to. I then put a few buyers in competition and managed to sell my car for $300 more than the listed price! Three hours after posting my ad, the car was no longer in my driveway.
Following this transaction, Facebook’s “intelligent” algorithm kept showing me 2007 Honda Civics in my Marketplace news feed. Two weeks later, I saw my car listed for sale again, this time at $1,500 more than I had sold it for! Despite this missed profit, I must admit that I found the experience interesting as I noticed several similarities with the world of investing. Here are three.
The Urgency to Act
The big mistake I made was acting hastily. Given the impressive number of inquiries I received in a short period, I should have taken a step back and withdrawn my ad. This would have allowed me to reassess the situation and adjust my price. I probably would have realized that the listed price was too low.
Stock market investors often have this nasty habit of acting with urgency. Take, for example, a stock that drops significantly after the release of financial results. An investor might be tempted to buy quickly for fear of the stock rebounding or to sell for fear that it might drop further. However, I believe the right thing to do is to take your time.
At COTE 100, we take the time to complete our internal reports, read the press releases and conference calls, and discuss the important elements with the investment team before doing anything with a stock. We favor a methodical and thorough approach. As my story clearly demonstrates, acting under pressure and urgency can lead to mistakes.
Staying Within Your Circle of Competence
Clients under the management of COTE 100 hold shares of one of the largest used car dealerships in the United States. As a result, I understand the dynamics of the used car market. However, I am far from being an expert in evaluating the price of a vehicle based on its model, mechanics, and mileage. I can hardly explain why two similar vehicles sell at different prices.
In this transaction, I was faced with buyers much more seasoned than myself. It was therefore difficult for me to win as my knowledge of the sector was inferior. To be at their level, I certainly should have done more research and comparisons before listing my vehicle.
In investing, it is important to stay within your circle of competence. In my case, there are sectors where I understand the risks and growth potential of the companies better. It is in these sectors that I am more likely to discover investment opportunities. I believe it is therefore better to focus your energies on sectors where you are comfortable and avoid those where your knowledge is inferior. If you still decide to venture into them, you will certainly need to put in a lot of effort and time to thoroughly study the situation. In summary, you increase your chances of losing if you trade in a sector you know little about.
An Imperfect Science
The price I listed for my car was clearly too low. Unanimously, the buyers realized it. However, I am convinced that the responses would have varied greatly if I had managed to ask all these buyers what the precise value of my vehicle was.
This parallel exists in the stock market. If I ask 20 investors to evaluate the value of Visa, I am likely to get twenty different answers, sometimes wildly different.
In the stock market, it is impossible to obtain a perfect evaluation. This is precisely why we have never really believed in hyper-complex financial models. Experience acquired in a certain field, comparison between different competitors, understanding of risks, and long-term potential are all factors that help better evaluate a company in the stock market.
The important point to remember is that you must ensure you get a sufficient margin of safety when buying a stock. This way, you significantly reduce the risk of an investment. Did the young man who bought my car need to know its precise value? I don’t think so. Thanks to a good margin of safety and a well-defined circle of competence, this buyer managed to make a few hundred dollars off my back. Well done, Julien!
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Jean-Philippe Legault’s Blog is published in
