I try to evaluate the speed of the bagger and the cashier. I rely on experience to recognize those who are usually the fastest and avoid the slower ones. I also examine the number of customers, the size of their carts, and the types of items they are purchasing. This analysis helps me steer my cart toward the line that seems most likely to move the fastest. Don’t judge me! I’m convinced you, too, perform some form of analysis before choosing your line.
The same principle applies to the stock market, although the process is certainly more complex than choosing a checkout line. An investor must analyze current and past data to estimate the future. They draw on experience to establish connections that will help them make an informed decision. Despite all these precautions and this analysis, they will sometimes be wrong.
At Costco, I’m wrong often. A customer notices that the price of an item is incorrect, and an employee runs to the back of the store to verify it. Another customer realizes they forgot that bagels are sold in packs of two and off goes the clerk again. Someone can’t find their membership card, and suddenly the line slows down. Another insists on splitting their purchase into three separate invoices, further lengthening the wait time.
If I were using an optimal approach at Costco, I would constantly reassess the different options around me, even after making my initial decision. If I noticed that my line was likely to take much longer than expected and the one next to me seemed faster, I should switch. Yet I rarely do so. In fact, I hardly ever see other customers change lines once they’ve committed to one.
Several factors explain this behavior. On the one hand, it’s as if any sense of analysis or vigilance fades after making the initial effort to identify the seemingly best option. The same level of rigor is no longer applied once the decision is made. On the other hand, the time already invested in waiting often weighs on the decision to change. Finally, there’s usually no contingency plan in case things don’t go as expected. At Costco, the consequences of a suboptimal choice are minimal, and the entire cognitive process probably isn’t worth the effort. In the stock market, it’s a whole different story.
In investing, our work doesn’t stop once we buy a stock. It is crucial to continue analyzing a stock after purchasing it. At COTE 100, we monitor the performance of our holdings daily and pay particular attention to quarterly earnings releases. We also completely review each company’s profile at least once a year. In other words, we start from scratch as if we were making a brand-new purchase, conducting a detailed analysis to identify any elements we may have overlooked during the year.
To offset the impact of sunk costs and unexpected developments, we use a sell scenario. This scenario differs from our purchase scenario, where we identify the key factors that guided the acquisition decision. In our sell scenario, we define the key elements we expect to see in the future. In other words, we identify the factors that would prompt us to ask serious questions if they were to change or fail to materialize.
In her excellent book Quit, Annie Duke recounts the story of a group of climbers attempting to summit Mount Everest in 1996. Their expedition leader was adamant that they must turn back at exactly 1:00 p.m., even if they were only a few meters from the summit. This rule was designed to ensure the climbers’ safety during the descent. In this story, some climbers followed the rule strictly despite being close to the top. Others ignored it and, tragically, perished on Everest.
Mental preparation and having a contingency plan helped some climbers make the right decision in 1996. In the stock market, as on Everest, it’s easy to be swept up by the emotions of the moment. While such preparation rules are applicable to investing, they cannot be as rigid. The stock market is constantly evolving, and new information can change our initial strategies.
However, we believe it is essential to define the key outlines of a sell scenario. This roadmap identifies the most important factors and helps prevent our decision-making from being influenced by a temporarily more optimistic or pessimistic context.
Whether at Costco, on Everest, or in the stock market, having the right tools and procedures in place is essential to making sound, well-informed decisions.
Jean-Philippe Legault, CFA
Portfolio Manager at COTE 100
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