“My stocks just dropped… should I sell?”

Stock prices go up and they go down. Since 2008, stock prices have fluctuated (sometimes wildly) and investors don’t always know what to do.

The expert advice out there is mixed: Some wisdom says “Cut your losers and let your winners soar”, meaning that you should only hold stocks that are generally going up. Other wisdom says that the best time to invest is when other people are running scared from a stock, meaning that you want stocks that other people see as losers (i.e. the stocks that are down).

So what should you do if the prices of the stocks in your portfolio drop? Cut them? Hold them? Buy more?

Here’s what I think…

Assuming that you did sufficient due diligence when you first bought the stock, then identifying the changes in the market’s valuation of the stock as well as the overall market sentiment can reveal what you should do.

  1. Dig into the news about the stock. Ask yourself this question: “Why has the market changed its mind about the value of this stock?” Figure out what has changed: What news item or piece of information has altered the trajectory of the price?
  2. Take a step back and look at the wider picture — the industry and the market as a whole. What’s happening at the bigger level that might have an influence on this stock?

Then use a chart like this as a guide to know what to do with the information you’ve discovered above…

  • If information about the company of the underlying stock has remained the same and if the market is unchanged (upper left quadrant), then this price drop could be something else, such a temporary sell-off (i.e. for tax loss purposes or institutional investor portfolio rebalancing). In those cases, I prefer to double-down and buy more.
  • If the information about the company of the underlying stock has changed but the market remains unchanged (upper right quadrant), then I need to take a closer look at the stock — to revisit whether I think the fundamentals are still true and to sell if they are no longer true.
  • If the company hasn’t changed but the market has (lower left quadrant), then I’ll revisit the stock but in general have tended to hold my stocks during this time. Market corrections are cyclical and I’m not going to worry about them too much.
  • If the company has changed and the market has changed (lower right quadrant), then it is very likely time to sell because my entire profit thesis when I first bought the stock is no longer relevant.

This chart isn’t ever going to be perfect for everyone — we each have different investing goals and time horizons — but when you open up your portfolio and see that one or more of your stocks have fallen, a tool like this is a useful way to take a step back and apply a layer of analysis to the situation so that you don’t simply sell in an uneducated knee-jerk reaction.

Fall in love with ‘no’ — Follow-up post

Recently, I wrote a post about why business owners and sales people (and especially financial advisors) should fall in love with no.

You should go read the post but, to summarize, I suggested that “no” isn’t as bad as we tend to make it out to be and a bunch of “no’s” are just part of the journey towards “yes”!

Shortly after writing that post, I spotted a link on Twitter about someone who has created a technique for falling in love with no. It’s pretty awesome and I think you should read it.

His name is Jia Jiang and he owns a company called hooplus.com and he blogs at a site called entresting.com. His blog is built around a concept of “Rejection Therapy” in which he is attempting to make 100 odd or even audacious requests with the “hope” of becoming immune to rejection. He writes:

I am going through 100 days of Rejection Therapy, aiming to have one rejection per day by making crazy requests. My goal is to desensitize myself from the pain of rejection and overcome my fear.

Among his requests so far, he has tried to borrow $100 from a stranger, ask a girl out to dinner, slide down a firepole at a fire station, challenge a CEO to a staring contest, have Jeff Probst sing a song to his son, make an announcement on a Southwest flight, and more. Some are weird, some are way out there, some are pretty awesome. You can see his rejection scorecard here and following along on his blog here.

I think this is awesome because Jiang has correctly identified the importance of desensitizing himself to the pain of rejection… which goes along with my assertion that we have to fall in love with “no” instead of fear it. A sales person could very well create his or her own “Rejection Therapy”. You don’t have to just become immune to the fear of “no” in a sales setting… why not become immune to the fear of rejection in any setting? Surely that will have an effect on your sales efforts, too!

Business model: Affiliate

I occasionally blog about different business models so that people who are looking to start a business or extend their businesses are aware of their options.

THE AFFILIATE BUSINESS MODEL

In the affiliate business model, the business owner identifies a niche and establishes relationships with other businesses that serve that niche. Then the business owner refers prospective buyers to the other business and receives compensation for any purchases made.

It’s a good business to start because there is low overhead — you don’t need to own any inventory yourself. All you need to do is brand yourself well in a well-chosen niche and profit every time someone buys. And, it’s also a good “add-on” business because it can easily plug into an existing business model to provide an additional revenue stream.

Here are some tips to help you:

  • There are a lot of people serving some niches (like internet marketing or the business opportunities niches) while other niches are terribly underserved. I think you’ll be more successful serving the underserved niches.
  • Some affiliate success stories result from high-trafficked blogs but I think the very best type of affiliates are delivered through email. Email marketing, when done right, still works well.
  • Build rapport, trust, and credibility with your market by providing free information and lots of value. A free report or some software is a good start but I’m also a firm believer in continuing to offer value long after that initial value was provided early in the relationship.
  • This is very much a relationship-driving business. You need to build relationships with your list of buyers (even though they are not buying from you) and you need to build relationships with your vendors. (I run several affiliate brands and one of them took a huge hit early on when the relationship between me and the vendor soured. It was my fault: I didn’t maintain the relationship and a few misunderstandings between us melted down the relationship.

What I’m working on this week (Jan. 28 – Feb. 1)

The end of January… already? Yikes! Better kick it up a notch.

At the beginning of the year I set a bunch of daily goals for myself. Now that we’re near the end of the month, I’m reviewing my progress. In some of the goals, I’m hitting them daily or almost daily. But with other goals, I’m really struggling to hit them. In fact, with two goals, I’ve only hit them less than half the time. But they are achievable, I just don’t get to them. That tells me something: It tells me that those particular goals are ones that I really struggle with doing. So I need to rethink how I’m going to do them and try to find a way to light a fire under my ass on them. The results are important to me (but apparently not important enough to do them… yet).

So here is what I’m working on this week:

  • It’s month-end, so I’m invoicing clients
  • I’m brainstorming a book for a mortgage broker
  • I’m putting a bunch of pieces in place for the real estate investing copywriter brand I’ve been building.
  • I’m continuing to push through on a real estate investor’s book and on my own book.
  • I have a couple of reports to start — one for an investment site and one for a joint venture I’m in.
  • Plus my wife is still sick so I have to take care of her! :)

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Financial reports would be more interesting if the cover looked like this

mastermindI used to own the well-known game Mastermind in this very famous box…

… and was recently thinking about the game again.

After a quick google search to see if I could find a copy of the box, I found this very entertaining article about the original box design (and a recently updated photo). Definitely worth a read!!!

While talking about the game and the original box design with some friends who also recognized it, I remarked that financial reports would be more interesting if they were published with this picture on the cover.

Suddenly, you no longer feel like you are reading a financial report for some mundane, generic, “average” company but rather you are the part of an evil plot and those two are looking to you to crunch the numbers to see if you can fund their giant orbiting laser beam. Who wouldn’t want to read financial reports like that!

(What’s the depreciation on a billion dollar satellite designed to blow up the earth? And should you use straight-line depreciation or the reducing balance method?)