If you had bought CSL when it floated in 1994, a little over a decade later you were sitting on a ten-bagger. Most investors would have been happy to cash in then, but as Chris Hall, CIO at Ellerston Capital told us, that would have been one mistake to avoid.
Chris imparted a great deal of wisdom when we sat down recently, distilling thirty years of market experience into three mistakes investors should avoid. The first of these being:
“Don't sell your winners too early because they will keep on delivering if the business models are there”.
CSL, for example, kept on rising and today it is more than a 100-bagger from its listing price. Watch the clip to hear the 3 mistakes to avoid in full.
The first mistake to avoid is selling really, really, good businesses too early, and thinking that stocks are overvalued. That is, stocks that have got structurally strong tailwinds, and structurally strong business models, and then have this structurally strong cash flow and dividend profile. Because the compounding effect is missed.
CSL's a classic example of that. I mean, looking at the history of the share price, and what the yield would be if you'd bought that stock at, the float, I think it was $2. Same with Macquarie Bank. It's the same sort of argument. That's the first lesson.
The second lesson is trying to use yield, optically high yield, as a major part of your selection process. Because as I mentioned before, the rate of disruption with business models and the dividend cover that's now prevalent with a lot of these names, and where pay ratios are, there's very, very little cushion to be able to sustain or grow the dividends when the earnings come under pressure because of those changing conditions.
The third one is to be very wary of picking cyclical turnarounds if the businesses haven't got again, a really good position of strength in what they're doing. I might envisage a time where I might own some resource stocks. Now, if I look at BHP and Rio, they've got really, really, strong market positions, and so you can look at their sustainability a lot more favourably than just perhaps a small retail cyclical stock which has got no real competitive advantage.
I think probably one of the biggest of these lessons is don't sell your winners too early. Because they will keep on delivering if the business models are there, and they will compound, and they will deliver you very, very successful returns over the long term.
Don't get caught in a trap
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Good advice Chris. I think most of the time the problem is that instead of asking a hard question i.e does this business has real competitive advantage, investors substitute that with an easy question i.e is the share price going up? Yes means the business has competitive advantage. People start thinking what they own is the next CSL.