Ep9: Colin McLean – Risks in Value Investing: When to Cut Loss on a Declining Stock

Colin McLean is the Founder and CEO of SVM Asset Management, an independent Edinburgh-based fund management group specializing in UK, European & Global equities. Colin is a regular member of CFA Institute and was elected to the Board of Governors in 2012. He is a Fellow of CFA UK, a Chartered Fellow of CISI and a Fellow of the Institute & Faculty of Actuaries. Colin is also an Honorary Professor at Heriot-Watt University, lecturing in behavioral finance, and guest lecturer at a number of universities. He is a regular contributor to financial media and conference speaker on investment, hedge funds, and behavioral finance.

In this episode, Colin shares the importance of bringing in some contrary view and dealing with the emotion particularly challenges in value investors.

 

 “It is a declining business. But of course, as value investors, you always think there is potential recovery. ”

-Colin McLean

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Resources: 

Topics Covered: 

00:56 – Colin McLean’s professional background

02:51 – The type of investment Colin ventured in, and the circumstances leading up to his worst investment

03:20 – Colin shares his value investing story: investing in a 100-year old legacy retail company

04:55 – Warning signs of a declining investment

07:47 – Colin’s takeaway from the experience

09:21 – Value investor insight, contrarian value investing

09:45 – How does a value investor reconcile prevailing wins against consensus

13:58 – Colin’s actionable advice to help people protect their investment

Main Takeaways

  • Lesson 1: You need to look much harder for what the negative view is. It is very important in owning a stock, not only to have a view of your own analysis. But to try to understand where the consensus is, where the market is because you need it in making a decision to differ from the consensus. If there is a disconnect between your analysis and what is happening with the share price, you need that contrary view into your own mindset.
  • Lesson 2: Cut the position almost automatically if the things persistently move against your analysis. Taking a position is not a difficult thing to do, you can easily convince yourself with the remaining two-thirds of your portfolio, if you are right ultimately, because the two-thirds will be more than the recovery of the money but you are actually one step closer towards reducing the emotional impact of the loss.
  • Lesson 3: Nothing is sacred in investing even 100-year old companies can go bust.
  • Lesson 4: Trying to make money in a declining industry is hard. From a research perspective, identifying segments within the industry can potentially prevent you from overly pessimistic or optimistic about a general industry.
  • Lesson 5: Be willing to immediately take a portion of the position off if a share price falls. Partial cut loss can protect your gains. It does not mean your analysis is wrong, it just means that it was possibly mean the wrong time.
  • Lesson 6: Have a counter-narrative of your analysis. Let people milk you for why you have an opposite view. Bring in the challenge to look at what can go wrong and look for the signs what the portfolio is going to be as you go along.

 

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About the author, Andrew

Dr. Andrew Stotz, CFA is the CEO of A. Stotz Investment Research, a company that provides institutional and high net worth investors with ready-to-invest stock portfolios that aim to beat the benchmark through superior stock selection.

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