This is the editorial of our monthly Quant Value Investment Newsletter published on 2023-12-05. Sign up here to get it in your inbox the first Tuesday of every month.
More information about the newsletter can be found here: This is how we select ideas for the Quant Value investment newsletter
This month I would like to talk to you about REGRET, how it can lead to bad decision making, and what you can do about it.
But first the portfolio updates.
Portfolio Changes
Europe – Buy One – Hold Two
One new recommendation this month as the index is above its 200-day simple moving average.
The company is a REALLY undervalued Italian manufacturer of motor vehicle parts trading at Price to Earnings ratio of 4.5, Price to Free Cash Flow of 3.8, EV to EBIT of 4.1, EV to Free Cash Flow of 9.1 and Price to Book of 0.7.
Hold - Two
Continue to hold Naturhouse Health S.A. +2.1% (recommended December 2021) and Shoe Zone plc +16.2% (recommended December 2022) as they still meet the portfolio’s selection criteria.
Braemar suspension lifted
If you did not manage to sell Braemar Plc in July because its listing was suspended, the company is trading again so you can now sell it at a price of GBP2.82. The current price is 21% higher than the price of GBP2.33 when we recommended the company be sold in July.
North America – Sell One
No new recommendation this month as the companies we found elsewhere in the world fit the newsletter’s investment strategy a lot better.
Stop Loss – Sell
Sell DATA Communications Management Corp. at a loss of 1.5%
Asia – Buy Three – Sell Two – Hold Two
Three new recommendations this month as the Japanese index is well above its 200-day simple moving average .
The first is a growing Japanese construction and design of building equipment company trading at Price to Earnings ratio of 8.7, Price to Free Cash Flow of 6.5, EV to EBIT of 5.1, EV to Free Cash Flow of 5.8, Price to Book of 1.1 and it pays a dividend of 3.3%.
The second is a fast-growing Japan-based company engaged in purchasing and sales of pharmaceuticals trading at Price to Earnings ratio of 10.8, Price to Free Cash Flow of 11.8, EV to EBIT of 5.0, EV to Free Cash Flow of 8.7, Price to Book of 1.4 with a dividend yield of 1.6%.
The third and last company is a very undervalued Japanese manufacturer and seller of hydraulic shock absorbers and hydraulic equipment. It is trading at an attractive Price to Earnings ratio of 4.6, Price to Free Cash Flow of 5.3, EV to EBIT of 5.4, EV to Free Cash Flow of 6.8, Price to Book of 0.6 and pays a dividend of 4.4%.
Sell One Hold Two
Sell Artnature Inc. at a profit of +24.7% as it no longer meets the portfolio’s selection criteria.
Continue to hold Exedy Corporation +65.4% (recommended December 2021) and Nojima Corporation +8.0% (recommended December 2022) as they still meet the portfolio’s selection criteria.
Stop Loss
Sell Fuji Corporation for a nice profit of 27.6%
Crash Portfolio – Sell One
No new Crash Portfolio ideas as most markets have recovered.
To date the 15 Crash Portfolio ideas, recommended between August 2022 and May 2023, are up an average of 26.0%!
Sell One
Vinx Corp. received a takeover offer at JPY2020. As the current price of JPY2015 is only 0.2% below the takeover offer, rather than taking the offer (and waiting for your money) I suggest that you sell now for a nice profit of 51.8% in less than a year!
Looking Back and Forward: The Role of Regret and Fear in Investment Choices
This month I want to talk to you about something we have all experienced at some point in our investment journey – regret over past decisions and how it impacts our future decisions.
Wishing we could turn back the clock
We have all been there, wishing we could turn back the clock to seize a missed opportunity or steer clear of a bad decision.
This regret can sting, especially when we think about how different things could have been.
Imagine you are a lottery player. You did not renew your ticket, only to see your usual numbers win the jackpot of $2 million, I am sure you have experienced something similar with a stock you missed out on. I have, a few times.
Positive and negative regret
Regret can be a teacher. But it can also cause us to avoid making decisions that have led to pain in the past.
You might have noticed a common tendency we have of selling winning stocks for a fast profit while holding on to the losing investments “to get our money back”.
We are nervous about a winner turning loser, or hopeful that a loser could turn around.
Buying more of a losing investment
And here's another strange but common practice: we often pour more money into stocks that are underperforming rather than the ones that are doing well.
Regret aversion plays a part here. If we didn't invest heavily in a stock that's performing well, we might regret not having bought more initially. To avoid facing the mistake, we might not add more to that winning position, even though we believe it'll continue to do well.
Regret aversion isn't just about feelings. It's also because we compare what happened to what might've happened.
Imagine a bull market in some asset, crypto for example. If you did not invest you may feel regret but if all your neighbours celebrate their crypto windfalls the regret hits harder.
As you have most likely also realised regret aversion is a strong emotion, and it has a big influence on our investment decisions!
How to move beyond regret
As these feelings are normal and automatic if we don’t change something they will for ever cloud our decision making.
This means we must put systems in place to stop regret holding us back.
A System to help you
What we need is a system that stops our losers fast and lets our winners run.
My best ideas on how to do this is:
- To stop losses fast with the trailing stop loss system
- We let winners run if a company continues to meet your investment strategy
- Stop investing when markets are falling
Stop losses fast
By stopping losses fast the pain from losses are lower and because of this you are much more likely to invest or stay invested because you know you can get out AND you know exactly why and how.
Keep positions small
In the newsletter we also keep positions small (we never bet the house). This means you may miss out on large gains but losses in any one company is limited. This also makes it easier to stay invested.
Stop buying when markets fall
By not buying when markets are falling keeps your emotional stress low. If you do this, you are much more likely to stay invested and not throw in the towel and sell everything at the market lows because you are emotionally exhausted!
Then, because you have kept your emotional stress low it makes it a lot easier to start investing again when markets turn up again.
What the newsletter does for you
All this is exactly what the newsletter automatically does for you:
- It stops buying when markets are falling
- It only buys small positions
- It follows a strict trailing stop loss system
- It lets winners run as it holds investments over years if the companies continue to meet its quality value and momentum selection criteria.
May lower returns slightly
I am not going to lie to you and say that if you do all this it will give you the highest possible returns as well.
It won’t.
Following these rules may lower your returns slightly BUT they are there to make sure you stay in the game; this means it lets you stick to your investment strategy over the long term that is where the real benefit is.
I hope this article sheds some light on how our emotions affect our investment decisions and how you can organise your investment system to keep emotions in check.
Doing this will give you the best chance of great long term investment returns.
As always, I'm here to support you on your investment journey so please let me know if you have any questions or comments.
Wishing you profitable investing
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