How to Stay in the Game Long Enough to Win
Welcome to issue #12 of The Davem Dish. Every two weeks I share what actually works in investing based on my 20 years of wins, losses and expensive lessons. You’ll also get my thoughts on solopreneurship and life in general because the same principles apply — keep it simple, stay consistent and focus on what matters.
I don’t lose more than 12% on a single stock. Not because I’m a genius but because I decided losing big is not an option.
I learned this the hard way. Years ago, I bought RINO International, a Chinese environmental equipment company whose financials “appeared” strong and the stock was trading at an attractive price. The company misrepresented its revenue, though, and the stock dropped 85% before being delisted. I didn’t use a stop loss order and my investment tanked along with the stock price.
The biggest risk to building wealth long-term is losing your confidence and becoming too scared to invest after a big loss. In addition to now using stop orders on every investment, here are my five simple rules to not let that happen:
RULE 1: Eliminate the Unknowable
I don’t invest in Chinese companies. After RINO and a few other “surprises”, I learned some risks aren’t worth any potential return. The Davem Method is a data driven approach that is industry and country agnostic — except China. When you can’t trust the numbers, there’s no reason to even perform an analysis or consider investing.
RULE 2: Position Sizing
I’m a big fan of small caps and the potential they have to grow but they are inherently more risky than large caps. Less cash, higher cost of capital etc. So, I use a simple approach to position sizing — I invest half the amount I would invest in a large cap.
I don’t use “conviction” for sizing either. Conviction is an emotion and relying on emotions leads to poor investment decisions.
RULE 3: The Sunk Cost Fallacy
“My position is down 20%, but my conviction in the company is strong so I’ll buy more and lower my cost basis!”
This is how 20% losses become 50% losses. Once I enter a position, I never average down if the stock drops. Rather, I’ll cut my loss short and move on. If my analysis still holds, I can always buy the stock again at a lower price.
The math is unforgiving. If you ride a loss down 50%, you need a 100% recovery just to break even. A 70% loss needs a 233% recovery. The psychology of big losses is even more painful.
RULE 4: Don’t Force Bad Investments
Right now, markets are at all-time highs and quality companies trading at attractive prices are scarce. I don’t want all my portfolio in one stock, I don’t want to chase overvalued stocks and I don’t want all of my portfolio in cash so I invest in low-cost ETFs that mirror the major indexes.
Simple, easy and profitable in a bull market:
YTD Returns
S&P 500 +13%
Russell Mid Cap +12%
Russell Small Cap +9%
Even with ETF’s, I use trailing stops. Bull markets don’t last forever and I don’t want to watch my gains evaporate.
RULE 5: Predictability Over Predictions.
I only invest in quality companies — those with a consistent track record of financial performance that allows me to make reasonable assumptions about future success.
The Davem Method identifies these companies by screening for financial metrics that matter, valuing using simple fundamental analysis, and determining when to buy and when to systematically sell.
Without a disciplined, confident approach you can make scattered, emotional decisions that can tank your portfolio and lead you to quit.
You can recover from a 12% loss with one good investment. You may never recover from a few 50% losses — monetarily or psychologically.
We need to stay in the game long-term to build real wealth.
Learn more about how the Davem Method can help you invest with confidence with my free guide Stock Selection Simplified.
Davem Watchlist Insights
Recently removed Copart ($CPRT) , Chipotle ($CMG) and Lululemon ($LULU) . Why? They stopped delivering quarterly growth that meets my criteria.
Current scoreboard:
Overvalued: 19 companies — patience
Fair value: 4 companies — watch closely
Undervalued: 10 companies — ready to move at the right price
What companies do you think are currently undervalued? Let me know if the comments?
Lastly, let’s look at monthly winners and losers:
For 24/7 access to the full Davem Watchlist, upgrade to a paid subscription.
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Cheers,
Andrew
The content provided are personal opinions and presented for educational purposes only, as of the date published or indicated. Davem Advisors LLC is not a bank, licensed securities dealer, broker or investment advisor. Displayed returns are unaudited. Nothing stated constitutes a recommendation or advice as to whether any investment is suitable for a particular investor. You alone are solely responsible for determining whether any investment, strategy or service is appropriate for your objectives. Past performance is no guarantee of future results. Inherent in any investment is the risk of loss.