You make an investment, and it goes well for a while, but then it gets shaky. So you have to make a judgment call: Has the story changed, in which case you sell; or has the story stayed the same, in which case you hold, or buy more to exploit the mispricing?
I sat down with James Abela, Portfolio Manager at Fidelity Future Leaders Fund, and Kate Howitt, Portfolio Manager at Fidelity International, for their takes on navigating this decision all investors will have to make at some point. Read on for the transcript with full video below.
The more you know, the better your decisions
I think bottom up, and the deeper your knowledge, the greater your confidence. It's not necessarily completely correlated to that, but I think the deeper the knowledge base, the more comfortable you should feel.
But there's also the information disadvantage where you think you know everything. I think that balancing act is tricky.
I do think the more you know generally, the better your decision making will be, so the less nervous you will be and the less jittery you will be about price volatility.
So you push your duration out and you think over three or five-year period, and ask: what does this company look like, and what does the market structure look like?
I think that once you answer that, then price volatility can be seen as much more of an opportunity, rather than something that makes you nervous. Ultimately, it's all about depth of understanding.
Have conviction, but be flexible
There are so many really good portfolio managers in Fidelity, and I've learned from so many of them over the years. One in particular, Anthony Bolton, was quite a famous portfolio manager of ours in London, and he said a lot of really helpful things, but on this point, he talks about the idea of flexible conviction.
Which means you've got to stick to your guns - until it's time to not stick to your guns.
For every stock that I own, I will know why I own it and I'll know that I'm happy to own it, but I also know that at some point, something is going to change. Either the valuation's going to get too stretched even though everything is wonderful, or circumstances are going to change: management could change, the competitive set could change, or a better opportunity could present itself.
It's understanding: why do I own this stock? What your thesis is. And we are very rigorous about that. Every analyst who initiates on a company has their reasons for why they own a stock. What is the inefficiency that you think we are exploiting? Why do you think this stock is going to do better than the market? You know what your thesis is and then constantly test that.
If the thesis changes, well, then you reevaluate. If the thesis is broken, you sell. If your thesis is broken, you sell regardless of whether you are booking a loss or not, because that is going to happen. We have both been doing this long enough, and there have been plenty of times where we've had to change our mind one way or the other.
Full video here
You can watch my interview with James and Kate in full here