Transcription
So today, we're going to see what needs to be done. This is about stocks in your portfolio that have collapsed, meaning they've lost, for example, 40%, 50%, or even more. And then, I'll give you my five-step method to know what to do in these situations. So, this is an extremely classic scenario in the stock market. You buy a stock, maybe at first the stock price goes up, you feel no worry, there are no negative news or anything. So everything is going well. Then at some point, the stock loses maybe 5%, 10%. So far, so good. You tell yourself, you might even think it's an opportunity to buy more. You buy at that moment, you "buy the dip." And then the 10% becomes 15%, 20%, 30%. And then, you start asking yourself questions, you know, you start to doubt a bit, you look at the news, and suddenly you discover in the news that the company now has a lot of problems. So you discover that there's now a competitor or competitors threatening the company, that there's a new technological innovation that threatens to completely disrupt the company of the stock you bought, and so on. So suddenly, you discover a lot of problems that nobody was talking about before. So it worries you. You look at your portfolio, you see your big unrealized loss in red. So that adds more stress, it adds fear. You're afraid the stock will keep falling and you'll lose even more, or even that it will go to zero and you'll lose everything. And that's where you start to have an irresistible, almost irresistible urge to get rid of the stock and sell as quickly as possible. And so this is the kind of reaction that all stock market investors have already had, at least at the very beginning, and that we can then learn to manage. And so the source of this is simply human psychological biases. So psychologically, these are mental shortcuts that happen in our brain, which are mainly, for the most part, not all, but most of them, due to the fact that Homo sapiens appeared 200,000 years ago and the Neolithic period began only 10,000 years ago, and so you had 190,000 years in our history where we were hunter-gatherers, and so our brain remained adapted to this hunter-gatherer life, and our lifestyles have evolved faster than our brains, and so we still have reflexes today that are not, well, that are no longer useful to us, that are not at all adapted to the world we live in, or even that are counterproductive. And precisely in the stock market, these shortcuts, these mental shortcuts, work 100% against us. And so, in our situation, there are three main ones at play. The most important being the third one. So first, you have the recency bias, which is the fact that our brain gives more importance to what has happened recently. And so, this works in both directions. If a stock has exploded recently, say in the last few months, or the last year, then intuitively, and this happens totally unconsciously, we will tend to imagine, to see the curve continuing like that indefinitely. This is a huge trap, but that's another topic. And so, this also happens on the downside. So, if a stock has been falling for several months, then unconsciously, you imagine this curve extending indefinitely, all the way to zero, and therefore, until we are ruined, and we have difficulty visualizing the turnaround. So, first, there's the recency bias. Then there's herd mentality, which is the fact that when we see everyone buying, we have a natural urge to follow the herd and buy with everyone else. And conversely, when we see everyone selling, it makes us want to sell. And then the most important is loss aversion. This is the fact that losing 50% feels twice as bad as gaining 50% feels good. So, for example, if a stock is at 100, and it goes to 50, it will make you suffer twice as much. You will feel it, it will cause you twice as much discomfort as the pleasure you would get from seeing the stock go from 100 to 200. So, in short, we feel losses twice as strongly as gains. And so, in these situations where a stock has collapsed, you want to sell because your brain has an almost vital need to stop this pain. And furthermore, this desire to sell is amplified if you look at your portfolio often, because you are exposing yourself to this loss, you see this red number, and so you are exposing yourself even more to loss aversion. So now, how do we defend ourselves against our own brain, which doesn't want us to make money, and therefore, how do we know whether to sell or not in this situation? So, I have five steps. The first step is a step of awareness. It's to truly integrate, and I know this is something everyone says but doesn't truly integrate, I realize. It's to truly integrate that investing is long-term. And this implies that on the path, during this long-term journey, there will necessarily be drops that will sometimes be very significant. There will inevitably be stocks that will go down by -20%, -30%, even -50%. It's highly probable that, I think, almost everyone in their investing journey will have stocks that drop by -50% or even more, more than once. And a good example of this is Coca-Cola in the 90s. So, in 1988, Warren Buffett bought $1 billion worth of Coca-Cola stock. Today, $1 billion doesn't seem like a lot for Berkshire Hathaway, but at the time, you should know that it was the biggest investment they had ever made. So, $1 billion in '88. And it's interesting to note that this happened precisely after a drop of, roughly, after a 33% drop. And over the following 10 years, the stock went from $2.30 to $44 in 1998. So, that's almost a 20x return. And actually, at the end of the 90s, a question was asked to a group of investors. They were asked how many of them owned Coca-Cola over the last decade, and the entire room raised their hands. So, everyone had owned Coca-Cola in their portfolio. And then they were asked how many of them had the same performance as Warren Buffett. And then, well, most people lowered their hands. And one of the main reasons is that many of them had sold during the downturns, out of fear that the business was in decline or would no longer grow in the future, or things like that. So, they were precisely caught by loss aversion because you have to look at the journey. There would have been many moments where one could have panicked. So, bought in '88 here, but then we have in '89 a -20%. Just after, we have a -25%. Then from January '92 to July '94, it didn't move for two and a half years, with drops of 20% in between. And then, then, then here, we had a -30% in '97. So, when we zoom in like this, we see that the journey was not particularly smooth, and there were several times when we could have doubted, we could have been afraid, we could have panicked. But if we zoom out now and look at the overall trend, if we adopt a more long-term view, then, well, we see that from '88 to '90, ultimately, all these drops in between were just noise and could have been ignored. So, you always have to remember that a price drop, whether it's -50% or whatever, is never a reason to sell in itself, simply because, no matter what, it will be part of the journey. Even a stock that will go up 100x, 1000x, on the way, there will inevitably have been huge drops, -20s, -30s, -40s, -50s, maybe even -60s or -70% drops. It's part of the journey. And so, from that point of view, a price drop in itself is never a reason to sell. But it's even worse, because not only is a price drop never a reason to sell, but it's also the worst time to sell. In fact, the best time to sell is at the peak of optimism, the peak of euphoria. So, the period when you feel no worry, when the news is positive, there are no signs of risk, no one is talking about risks, valuations are high, prices have been rising in a straight line for some time. And conversely, after a huge drop, it's the worst time. Why? Because it's after huge drops that the biggest performances happen. And the explanation for this is that the performance of a stock comes from mainly two things: the growth of free cash flow per share and the variation of the valuation multiple. So, in this case, the price-to-free cash flow ratio. And so, if you have, let's say, a free cash flow per share that doesn't move, but the price-to-free cash flow doubles, going from, for example, 10 to 20, then the stock price will double. Conversely, if you buy at 30 and it goes to 15, then the stock price will be divided by two. So, when there has just been a huge drop, for example, let's go back to Coca-Cola in '87, in October '87, the price drop actually lowered the valuation multiples, so it lowered Coca-Cola's price-to-free cash flow ratio, and therefore, mechanically, the future performance at that moment was higher starting from, ideally, starting from October 19, '87, or even from December '87 or January '88, than starting from the peak of August '87. So, naturally, you start from a higher valuation multiple, so future performance will be lower. It took from August '87 to April '89, almost 2 years, to get back to the same price. Whereas, at that moment, it was $3. Whereas someone who had managed to buy during that week was already maybe at 2x, or almost 2x. So, that was the first step. So, truly integrate that investing is long-term, that drops, big drops, are part of the journey of a well-performing stock, totally expected, and therefore, one should not be surprised by them, let alone panic, and then remember that moments of panic are precisely more moments to buy than to sell, since it's after them that we get the best future performances. The second step will allow you to reduce loss aversion. This is something, I know you can do it on Interactive Brokers, I don't know about other brokers, you'll have to check. In any case, on IBKR, you can modify the columns you display in your portfolio. So, what you need to do is remove all the columns that give you information about the day. You know, unrealized gain or daily unrealized loss in percentage, in gross value. All of that, you remove it, you only keep the long-term stuff. That way, you won't be exposed anymore. So, during downturns, you won't be exposed to the -3%, -4%, -5%, -10% of the day. And when it starts to be 1 year, 2 years, 3 years since you've been investing, if you haven't bought anything bad, then by looking only, by displaying only your long-term unrealized gain or loss, you know, not the daily one, then, at some point, it will all be green. Eventually, you'll only have unrealized gains. And so, the mere fact of seeing these green numbers, even if one day you had, I don't know, one day you had +10,000, if the next day you look and it says +7,000, you won't experience it as a -3,000. You see? Just the fact that it's always green, that it's always an unrealized gain, will be enough to deactivate loss aversion. So, doing that is already good. And then, you have the second level of this, which is to simply look at your portfolio much less often, and also look at your watchlist much less often, because that also shows you the daily gains and losses on the stocks you own. So, this is a second, even stronger way to not expose yourself to unrealized losses and therefore not activate loss aversion. Anyway, when there's something we want to stop doing, or rather, something we want not to do but find it hard to resist, the best thing is not to use willpower or anything like that. That doesn't work very well. The best thing is not to expose yourself to it. It's like if you can't resist eating Nutella if you have a jar of Nutella in front of you. The simplest thing is not to buy Nutella in the first place, and then, to succeed in not buying Nutella even more easily, is not to go down the Nutella aisle. So, you should realize that you can invest in the stock market but barely look at what's happening for weeks or even months, and then you come back, you see that there has been a huge drop for 6 months, and at worst, you're not aware of it. You've just continued your life, and so, you haven't experienced those feelings of stress from your assets decreasing day by day. Then, the third step will be to look at the company's figures to see if there is a visible decline in the numbers. So, for this, we'll take the example of Apple, for instance. Apple, whose stock price, well, I have the price here. It collapsed quite a bit in the 2010s. So, here in 2012, we had a -45%, and in 2015-16, we had another -33%. And, in fact, we still have a significant one here, -30% to -40%. So, between 2012 and 2018, you had three drops of around -40%. And yet, once again, we see that in the long term, it didn't change much. We could have simply ignored these drops. And so, if we now look at the results the company had during those periods, if we just look at the revenue, so 2012, well, in 2012, they had 45% growth, 2013 9% so a slowdown. But still, it's quite good. Then 2014 7%, 2015 28% a small drop in 2016, 2017 +6%, 2018 +16%, 2019 -2%. So, there's really no visible decline in revenue. There were two years with small drops, but that, I mean, it happens to absolutely all companies to have years of stagnation before picking up again. So, it's not really what I call a visible decline, just a year with a slight drop in revenue. You look at the free cash flow, so what's left after deducting all expenses, it's pretty much the same. So, we see that what made the market doubt, in hindsight, is that here in 2016, they had a small phase where they didn't have growth, and then again between 2018 and 2019. But that's not enough to conclude a decline, a company's trajectory is not a straight line, not a perfect curve. Well, the impact of the free cash flow drop on ROIC, but it remained good ROICs above 15%, and margins, nothing special. So, here, we saw that there were no signs of visible decline in the numbers. And so, up to this point, if there are no signs of visible decline in the numbers, then there is no reason to sell. A declining business would be, for example, a business that has several years of revenue decline, that has, I don't know, a free cash flow that turns negative for a few years, an ROIC that collapses, margins that collapse, debt that explodes, that kind of thing. So, no reason to sell if there's no visible decline in the numbers. Then, the 4th step is to look at what the market fears for the company. So, here, you'll just make a list, you'll read and listen to everything that's being said to understand why the stock is falling, what are the things that scare other investors. And then, you make the list, and for each of these points, you'll research whether it's credible in your opinion, how likely it is that the risk in question will materialize. And an example is the Meta stock, which I bought in 2022. So, in 2022, the stock had lost, at its peak, almost 80%. And so, at the time, the risks everyone was talking about were already TikTok competition, it was the Apple update, I think it was 14.5, which actually asked users if they wanted to be tracked for advertising. So, basically, for every person who clicked no, their navigation information was not sent to Meta for targeted advertising. There was also everyone saying that Zuckerberg was putting all the capex, all the investments, into the metaverse. The fact that no one goes on Facebook anymore. Facebook is finished, and I think there were other things too. But so, you list all of that. Well, for example, no one goes on Facebook anymore. You just need to look at the company's results. You saw that no, there was still growth in the number of users. There had just been one quarter, a drop in the number of users. I don't remember which metric it was. It must have been users, perhaps daily or monthly on Facebook, but you looked at all the other statistics, you took them over other periods, so either monthly or daily, it also increased. You looked at all the applications, it also increased. And again, you looked at the, well, it remained only one quarter of decline, and then you looked at the amount. I don't remember the amount, but it was, I even made a video about it at the time, but it was a drop of 0.something percent of users. So, it was completely negligible. So, already, this story of no one going on Facebook anymore, I told myself it's not credible. Then the story about Zuckerberg putting all the capex into the metaverse, again, you could see in the transcripts, in the earnings calls, that it wasn't true. It was 20% of capex going into Reality Labs, and Reality Labs contained different things, VR headsets, etc., now glasses, and the metaverse was only a small part of Reality Labs. So, the money invested in the metaverse was not at all the entirety of the capex, nor even 20% of the capex. And for the risk of the Apple update preventing them from tracking users well, they had launched something called API Conversion, which allowed sending events on the server side, not the client side. And Apple can do absolutely nothing about that. So, I concluded that, again, it was not a real risk. And so, well, that's the work that needs to be done: take each risk for the company in question, ask yourself if it's credible. If we estimate that they are not really credible, then, again, we have no reason to sell. And what's important on this point is that all these fears concern the future. And so, from the moment it's the future, we can't have certainty. We can't, we won't be 100% sure. Really, the only work to do is to ask yourself, does it seem plausible? Is the probability that these risks will materialize high or not? And if it seems a bit far-fetched, it doesn't mean it has a 0% chance of happening. There's always a risk in investing. We will inevitably have losses on some stocks. But so, if it doesn't seem credible to us, there's no reason to sell. Conversely, if all the risks in question seem obvious to us that they will happen, you see, there are cases like that where companies are truly dead. In that case, it means there was a problem at the time of purchase, because after all, with good stocks, this scenario is rare. Most of the time, with very good companies that have been around for a long time with strong competitive moats, with regular growth for a very long time, etc., most of the time, these fears ultimately do not materialize. So, after having a rational reflection, we conclude that it's obvious that the company is dead, then we need to review the stock purchase process. So, that was for point number 4. And point number 5 is to look at the valuation at the moment of the stock in question. If, despite the drop, it is still high or just normal. At that point, again, it shows that there was a problem at the time of purchase. It just means you bought too expensively. Perhaps you were convinced by very optimistic speeches at times when everything was going well and no one felt the risk. An example, for instance, at this moment, you can take Palantir, for example. I've talked about it several times, that for me it was one of the worst investments one could make in 2025-2026 because the valuation was extremely, extremely high. So, 174 times free cash flow. If we remove SBC, well, it's even worse, and even if you look at the price-to-revenue ratio, it had gone up. And that's the problem, it's that it had gone up, it's off the charts, but it was at its peak at 130, even at, yes, 140 times, 100, 150 times revenue, which is, well, it's beyond overvalued, there are no more adjectives. But if we look at the stock price, so Palantir, we see that at the moment I'm recording, the stock is losing, at its lowest, almost 40%, and at 30%, so it's still a significant drop. Yet, it's still at 82 times revenue, so it remains extremely high. So, someone who today would have Palantir shares and would be at -20% to 30% on their investment. And conversely, if following the drop, the stock is not expensive, so I can take the example of Meta again. Well, if at steps 3 and 4, I concluded that I had no reason to worry, and if at that moment I saw that the valuation was very low, then it was even less of a reason to sell, and on the contrary, it was precisely a time to buy and to take advantage of the pessimism. So, there you have it, those were my five steps to know whether to sell a stock that has collapsed. And to bring you the video, if you want to build your portfolio with me, there's a link in the description. So, I send out the best stocks of the week every week, with my target prices, an update of my portfolio at the same time. I also send out all the transactions I make, so stocks I buy, stocks I sell. So, I send them out the same day I make the transaction, with explanations of my decisions, analyses of the stocks, and you also have access to the archives, so with previous editions, including the stock I bought yesterday. So, there you go, you have the link in the description and at