Every investor loves to own a multibagger – a stock that rises to become many times its original purchase price. The problem is that we often sell these positions too soon, before they have a chance to appreciate in value. If we don’t sell, we sometimes get too complacent and hold on to them for too long, only to watch our profits vaporise as the share price falls further down the line.
The author of Contrarian Investment Strategies, David Dreman, argues that ‘even amongst the professionals, few religiously follow their own sell rules’, while many private investors don’t seem to have any at all. Fortunately, Dreman offers a solution. Let’s take a closer look, and use a recent multibagger, Victoria PLC, as a case study to test Dreman’s approach.
Taking the ‘Round Trip’Benjamin Graham, the father of value investing and the tutor of Warren Buffett, argued that Mr Market (an allegory for the stock market) had manic-depressive characteristics, shifting from euphoric moods one day to depression the next. These mood swings are represented on the chart below, where the share price (black line) oscillates around the intrinsic value (ie. true worth) of a stock, which is more stable over…
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