The uncertain economic outlook could hurt the financial prospects of a wide range of businesses. Therefore, it is more important than ever to analyze your current holdings to determine their capacity to cope with challenging conditions. This is one of the pieces of adivice that Peter Lynch, who delivered annualized returns of over 29% while managing the Magellan fund from 1977 to 1990, recommended to investors.
Analyzing your holdings
It is easy to look at your portfolio holdings as names and numbers rather than parts of real businesses. However, analyzing the business models of your holdings and considering their financial prospects is necessary. As Peter Lynch once said, “Behind every stock is a company. Find out what it's doing.”
With many industries facing a period of reduced revenue and profitability, now may be a crucial time to check the financial strength of your holdings. For many businesses, their financial prospects may have changed significantly since you purchased them, which could mean their investment appeal has declined relative to other opportunities.
Assessing areas such as balance sheet strength and economic moat could provide you with a clearer insight into a businesses' ability to survive in the short run, as well as its capacity to deliver improving stock price performances in the long run.
Reallocating your capital
Selling your existing holdings solely because the stock market has fallen is not a good idea. The stock market has always experienced cyclicality, so all investments are bound to "lose" money at times during the investment cycle.
However, failing to sell your holdings when they have experienced a material change in their financial position or in their outlook could be a short-sighted move. As Peter Lynch once said, “There's no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it when the fundamentals are deteriorating.”
A better idea than holding shares in now-unattractive businesses is to reallocate the capital elsewhere. This may be a painful experience for any investor in the short run, since it would mean realizing losses.
Ignoring other investors
When analyzing your current holdings, it can be tempting to follow the advice of your peers. You may, for example, be feeling cautious about the prospects for the stock market. This may lead you to seek the views of other investors when deciding how to manage your portfolio.
However, using your own analysis to make decisions about your portfolio could be a better idea, particularly when investor sentiment is weak. Other investors may dissuade you from purchasing quality businesses when they are undervalued due to them facing short-term risks that could cause volatility in their stock prices.
Peter Lynch has noted that it is never difficult to find negative views among the investment community: “You can find good reasons to scuttle your equities in every morning paper and on every broadcast of the nightly news.”
Read more here:
- Howard Marks on Trying to Predict the Stock Market's Future
- Buffett, Marks and Klarman on Taking Advantage of the Market Crash
- Seth Klarman on Buying Stocks in a Market Downturn
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