Decision Making in Equity Investment

Investing in equity securities requires a strategic approach, which begins with formulating an investment thesis for each stock. This thesis serves as a roadmap for your investment journey, guiding your decisions on whether to hold, buy more, or sell a particular stock.

Re-testing Your Investment Thesis

Your investment thesis should not be static; it needs to be re-evaluated periodically or when certain conditions are met:

1. Valuation Fluctuations: Significant increases or decreases in the stock’s valuation can trigger a re-evaluation.
2. Industry or Economic Changes: New information about the industry or economy can impact the stock’s performance.
3. Stock-Specific News: Any new information about the stock, such as earnings reports or management changes, should prompt a re-assessment.
4. New Investment Opportunities: If a potentially better investment opportunity arises, it’s worth re-evaluating your current holdings.
5. Availability of Spare Capital: If you have additional capital to invest, you might want to consider whether it’s worth increasing your stake in the stock.
6. Changes in Company Strategy: Analyze con-call and annual reports as soon as they come to analyze any change in company strategy and its impact on your thesis.
7. Personal Financial Situation: In case of adverse personal financial situation, you might want to take money out quickly.  

  

Consider buying more of a particular stock if:

1. You Have Spare Capital: If you have additional funds to invest and the risk-reward ratio of your existing thesis is better than the risk-free return, it might be worth increasing your stake in the stock. However, ensure that the concentration of any single investment does not exceed 30% of your portfolio to maintain diversification.
2. Valuation Decreased Substantially: A significant drop in the stock’s valuation might present a buying opportunity, provided your investment thesis still holds. You might need to rebalance your portfolio by shifting funds from another investment to this one.
3. Changes in Company Strategy: This would work same as valuation decrease. Generally, company strategy change will lead to a valuation change.   

Consider holding or selling a particular stock if:

1. Valuation Increases Substantially: If the stock’s valuation has increased significantly, it might be overpriced, and selling could be a good option.
2. New Industry Information: Changes in the industry landscape can impact the stock’s future prospects, prompting a decision to hold or sell.
3. New Stock Information: Any new information specific to the stock can influence its performance and necessitate a re-evaluation of your investment.
4. Better Investment Opportunities: If a new and potentially better investment opportunity presents itself, it might be worth selling the stock to free up capital.
5. Personal Financial Situation: Check liquidity and current valuation for your current portfolio to decide what you can sell.