Researching for your next stock? I always had the habit of researching into a stock, buy it and once I’ve profited from it, forget about it. I wonder how many of you do this as well. It’s as though the research material was one-use. Maybe it’s time to re-look at your old research! I thought it would be interesting to share with you on my thoughts about the famous 3Rs (Reduce, Re-use, Recycle) that can be used to finding your next stock to profit from!
Reduce: Reduce variety.
Would you rather be the Jack of All Trades or Master of One? Far too often we know too little about too many things than to know a lot about one thing. Which do you reckon to be more profitable? The world always pays a premium for Mastery. Personally, I believe it is so as well in the stock market. Being a master in one industry or in a handful of companies allows you to leverage on the knowledge that others do not know or understand, and thus profit from it. Little knowledge is dangerous because that’s where mistakes are commonly made, and that can cost you a lot. Therefore it might be a good idea to reduce to variety of industries to look at and instead, re-focus on the few industries that you really understand well.
Lesson to Learn: Re-Focus and Aim for Mastery
Re-use: Re-use Industrial Insights
While it’s good to consistently expand your ‘Circle of Competence’, don’t forget to keep leveraging on it. By always looking into new industries, you need to keep learning about new industries and how things work in the industry. This can be very time-consuming and if understood wrongly, cost you your investment as well. Rather than be busy learning something new, why not simply reuse industrial insights you’ve already learned in the past? While there is the feel-good factor of being busy and thus feeling productive, it does not necessarily mean you are effective in utilizing your time in the best way that provides you with the clearest investment thesis.
For example, the Oil & Gas industry has been one of the most discussed industry in 2016 because of the decline in oil prices. You may have sold your stocks in view of the oil prices falling back then. Has the industry finished riding the cycle? Is it time to re-look into the industry? You’ve already done your homework back then, all you need to do is to update yourself on the industry to see if it still makes sense to invest in it. This way, you save time, effort, and possibly re-profit from the same company!
Lesson to Learn: It’s not about being busy, it’s about being effective.
Recycle: Recycle Investment Idea
My favourite of the 3 Rs. Recycling! You have done your research on the industry and the company. Prices shot up and it didn’t make sense to hold onto it at its valuations back then and you sold it, taking your profits. Now that prices has fallen back to reasonable valuations, why not take the chance to buy it back again? The work has already been done in the past, all that’s left is to update on what transpired between the time you sold it and now. If nothing significant has changed, why not recycle the investment idea and re-profit from the same company!
Lesson to Learn: You don’t always have to dig to find gold. Sometimes they lay on the ground waiting to be picked up.