LTBH is like a 4-letter word

FinHabits: It is time to retire this phrase from my investor dictionary

I remember my first real job, right out of engineering school. I joined a large multi-national company as a software engineer, bright-eyed and bushy-tailed. During one of those early days on the job, I met a senior manager who asked me about my career goals. “To work hard, climb the career ladder and retire from this company”, I proudly declared. Oh, how naive was I. 29 years, 5 companies and about 16 career roles later, I am as far away from that original company as I can be - metaphorically and geographically.

In the investing world, LTBH means long term buy and hold. It refers to an investment holding that one intends to buy and then own for a long period of time, typically years, perhaps decades. I'll give you my shares when you pry it from my cold, dead hands! I have been questioning the point of this die-hard perspective for a while now and I think it is time to make a change in my own process. When we get married to a stock or drink too much of the Kool-Aid, it sometimes results in us putting on blinders to the early signs of trouble, leading to inaction and a misplaced belief for a turnaround…..and we all know that hope is not a strategy.

So I am getting rid of this four letter phrase from my investing vocabulary. Instead, I am adopting an LTBA approach for my high conviction holdings.

LTBA = Long Term Buy and Adjust

My LTBA plan is to:

1. Use my current process to evaluate and score my current high conviction companies after each earnings report.

2. If they continue to score well, they stay. If not, they get cut or trimmed & downgraded to my Bullpen portfolio. On a case by case basis, I will decide whether to give them another chance or get out of the position altogether. e.g. ROKU scored well after Q3 earnings and I gave them another quarter to stabilize & improve, but they did not and I sold that position after Q4 earnings. With TWLO, they did not score well after Q3 earnings and I should have sold immediately, but I hesitated to my chagrin and loss.

3. Take advantage of market rallies and overbought signals to trim excess fat off these positions when it makes sense.

4. The trimmings are used to build up a cash position when the market is rallying. In 2022, I want to have at least a 20% cash position at most times.

5. Add to my high conviction stocks at pre-determined buy points when the market dips and gives us the opportunity to put on a few more tranches to the position.

#3 above is the hardest for me to do consistently and well. FOMO sets in when a stock rises over multiple days and I hesistate to trim when I should. I am analyzing a few valuation metrics, but none of them seem to work well consistently for pre-profit, high growth stocks. Maybe I should just adopt a % gain rule like I do for my short term trades (I take my first trade profit at a 10% gain, no questions asked).

Today’s markets are driven by algorithms and options trades. Retail investors, like us, have to stay nimble and use every advantage we can get to stay ahead. Tweaking my high conviction positions, up and down, as the opportunity arises is my LTBA plan.