Once you’ve found that brilliant share, don’t sell

I’ve been posting 20-year charts of some locally listed stocks on Twitter. The returns have been awesome. Naspers* is up from R4.50 to R2 815. Capitec** grew from R2 at listing in 2002 to R852. PSG’s share price is up from R4.40 to R260. 

These are just some of the better examples of stocks generating massive returns over the past two decades. There are of course also the downside stocks, such as PPC, which was R6.50 in 1997 and now trades below R4 after reaching R53 in 2007.  

The comments about the winners were all pretty much the same: “We wish we could go back in time and buy those stocks in 1997!” Now of course that isn’t possible. So we have to try and find the next shares that will be the monster movers between now until 2037. It’s hard, but not impossible.

An important point is that a few people commented that the last two decades were a golden age of investing and that these returns are not likely to happen again. That’s not true; there will always be big winners in the stock market regardless of what’s happening. We just need to find them.

The first important lesson is to exit the losers. Even though we will seldom (if ever) exit at the top, PPC is an example of how bad things can get. Selling the losers is almost as important as holding the winners.

I say almost, because a loser can only ever cost 100% at worst, while winners can generate many times 100% in gains. But we still need to get out when things go wrong.  

Regarding those winning stocks – let’s deal with the second part first, holding on. Finding the next massive winner is hard. Very hard. But the even bigger challenge is holding on to that winner. If you’d bought Naspers at, say, R50, what would you have done at R100? And at R1 000? Sold and taken your profits?

That would have made perfect sense, except you’d have missed most of the real return. We have a fear of missing out and that makes us buy bad stocks. But it also makes us sell great stocks as we want to lock in the gain and get a sense of accomplishment.  

But we need to let the winners run and hold on even when they reverse, if the story remains compelling. We shouldn’t get despondent during the tough times. As I have written before, we need to know why we hold the stock and what attracted us to it.

And if the story and fundamentals remain intact, the price is less of an issue as it will catch up to the story in time. Over a 20-year holding period, markets will crash and rise, but we need to ignore the noise and hold on tight.  

All the abovementioned stocks were worth holding through the bear market of 2001 and again during the global financial crisis of 2008/09. In both cases they lost a large chunk of their market value, but as great companies they survived and when markets improved, they continued their runs.

Holding when times are tough takes courage, but it is made easier for me when I remember that I have time on my side. My favourite trick is to ask myself where I see this company when I am 65 years old and hitting retirement.

Will it still be dominant? Will its products or services still be needed? I find that doing this really helps put the current story and price into perspective and helps me hold on during tougher times and resist the temptation to sell.  

I will tackle how to find these winners in a future column.

*finweek is a publication of Media24, a subsidiary of Naspers.  

**The writer owns shares in Capitec.
This article originally appeared in the 7 September edition of finweek. Buy and download the magazine here.