In this series, we’ve asked Covestor managers: “What is the single most important lesson you’ve learned about being a successful investor, and how do you try to apply that today?”
Author: Derek Pilecki, Gator Capital Management
Covestor models: Long-Only Energy, Large Cap and Small Cap
After business school I worked at Clover Capital Management in Rochester, NY. Clover is a classic value-based investment firm and is now a division of Federated Investors. At Clover, I had a mentor who taught me that a regular mistake most value investors make is to both buy a stock too early and sell it too early.
Many value investors have a tendency toward thinking that if a stock they like is down a little, that constitutes a buying opportunity. But in many cases, a stock goes down for good reason – and has further to go. Patience can be a virtue with declining stocks.
I force myself to have a “cooling off” period before buying a declining stock. I use this time to do further research and double-check my assumptions. I’ll buy the stock once it has stopped going down or if I believe there is a near-term catalyst that will drive the stock.
Conversely, value investors also tend to sell too early when a stock is going up. Investors often get so excited with a rising price that they sell stocks when they are just starting to move in their favor. They think they are being conservative, but in fact in many cases they are leaving money on the table. Value and momentum are your friends. If a stock is going up, it has momentum that can continue to work to the upside. Another way of saying this is: “Let your winners run.”
How do you try to apply this in your current investing? What do you find are the challenges to applying it?
When buying a stock, I try to never buy a stock that is falling, especially stocks that are falling rapidly. I’m willing to let a stock go through a bottoming process before I buy it. Sometimes I miss stocks that are down just temporarily, but overall I believe in this approach.
And when I hold a stock that is going up, I aim to remain patient at all times before selling. A downside to this rule is that you never manage to sell right at the top. But overall, this rule has been central to my portfolio management and I remain committed to it.
