Best Ideas portfolio holdings Visa (V) and Precision Castparts (PCP) recently reported relatively disappointing calendar second-quarter results (here and here). Share prices of both portfolio constituents sold off a few percentage points following their respective earnings releases. Though growing more concerned when share prices drop is natural (and perhaps rightly so in some cases), one of the most effective approaches to staving off behavioral and psychological pitfalls (e.g. selling at the bottom, truncating gains, etc.) is to keep things in perspective.
In situations where a company’s stock has doubled or tripled, for example, a 5%-10% pullback should be viewed as “normal” trading activity, resulting from the concept of ‘profit-taking,’ or when some shareholders take some of their profits off the table (as a risk hedge). These selling shareholders are looking to return and may even take on a larger weighting in the stock once the dust settles after the quarter. Profit-taking differs from material sell-offs of 20%-30% or more over several weeks (on high volume), which can be cause for concern, especially if such large drops occur on stocks that haven’t run up as dramatically beforehand.
The very best way to keep things in perspective with your investments is to look at your holdings’ multi-year charts—not necessarily for technical patters but instead to gauge how far the stock has moved and over what time period. A simple reasonableness test to see if a pullback is “reasonable” in light of recent share price performance can be helpful within the decision-making process. In both Visa’s and Precision Castparts’ cases, we’re writing up the recent sell-offs to profit-taking, and by extension, we won’t be making any changes to their weightings in the Best Ideas portfolio.
