How often should you follow a company?
There is really no black and white answer to this question, but it’s a question investors often find themselves asking. I don’t know about you, but many times I find myself getting in a bad habit of checking in on my investments all too often. So I’m really not here to tell you that you need to check in more often–most of us probably already check in enough. But if you are not confident with your “tracking” system, I hope that you’ll enjoy this one and maybe implement tracking policies like these into your investment approach.
Let’s get right to it:
- Industry Leaders
- and Small Fish
Industry Leaders are the investments in your portfolio that have a very sustainable business model and a wide moat. In fact, the very best thing about them (and perhaps the reason you bought them in the first place) is that they don’t need to be checked on very often because you can rely on dependable future cash flows. Typically these companies carry a market cap greater than $10 billion.
When you buy an industry leader you look over the last 10 years of financial statements to predict the next 5, 10, or even 20 years.
So, with an initial horizon like this, why do many investors often resort to checking in on these companies on a daily or weekly basis? It just doesn’t make sense. Take a step back. Industry leaders don’t even change much on a quarter to quarter basis.
Each quarter keep an eye on key numbers like owner earnings or free cash flow and what might have caused any anomalies each quarter.
Every year, read the letter from the CEO or Chairman to get an idea about what management is thinking, planning, and their attitude towards its success and mistakes made during the year. When you feel that the business prospects have changed enough to merit a new valuation, do so.
How often should you check the price of an Industry Leader?
Instead, set some alerts. My Zecco brokerage lets me set up notifications when a stock moves up and down more than a specified amount in a given day. I receive these alerts instantly on my phone. For stocks with a market cap greater than $10 billion I typically set this to 5%. Most brokerages have some feature like this.
If yours doesn’t, set up some alerts with Morningstar or some other portfolio manager. Morningstar has a lot of great portfolio tracking tools. But keep in mind that even if you do receive an alert, it doesn’t mean you need to check in on your company. If the price is still within your comfort range for “holding” and the price change isn’t too significant then I wouldn’t be concerned with movements like these.
Middlers have market caps between $1 and $10 billion and are usually accompanied with a great deal of uncertainty.
These companies should be closely evaluated every quarter.
- How is cash being spent?
- Is it business as usual?
- Is it generating excess cash?
Middlers can move in price quickly and dramatically so it is important to not be overwhelmed by any price movements. Remember that price and value are two different things. Graham said that the in the short term, the market is a voting machine and in the long run, it is a weighing machine. The important point is to understand the difference between meaningful news and short term jitters and not fall victim to acting on emotions.
Set alerts for moves greater than 5% in one day but as I mentioned, these companies can have sudden movements.
Small fish have a market cap of less than $1 billion. Things can change fast with companies this small.
Consider a company with $70 million in revenue that loses a $10 million dollar contract. This would be a significant change to business as usual (if business ever is “usual”). But it isn’t very often that a company with $7 billion in revenue loses a contract worth $1 billion. For this reason, these companies should be tracked very closely.
- Revisit your valuations every quarter.
- Set alerts for stock movements of + or – 8% (+/- 5% movements are very common for stocks this size).
- Keep up with as much relevant news (from legitimate sources) as possible.
Although this sounds like a lot of difficult and time intensive work, it really isn’t. Scanning through the reports take about 30 to 60 min which can be spread over several days if needed.
Looking at any new headlines doesn’t take much time too.
Yes small fish can turn very quickly, but remember that these are companies, and unless there was a fundamental flaw to begin with, even small fish do not sink overnight.
What about you?
What are some ways you have learned to effectively track your portfolio? Have you ever found yourself caught up in looking at your stocks too often? Did you overcome this? How? Let me know in the comments below!