We all are always searching for new companies to invest in and each of us have different ways of going about this process. For Buffett, it is reading 500 pages a day and looking for the extreme difference in value that will allow him to purchase a company that has a large moat and will continue to push him cash to continue his investing cycle. For Bill Ackman, he is looking for a company that he can takeover and make more profitable for himself. For Peter Lynch, he is looking for small companies that fly under the radar that will have significant growth if everything goes as planned.

The key to these three men is that they have very specific guidelines to what they invest in and stick to those guidelines no matter what. This leads to them being wrong sometimes, but leads to them being right on a vast majority (and right in a big way).

So now the question arises, “What is your process in finding companies?”

This is something that you must lay out and stick to for a somewhat long period of time. The length of time is something that is so important, because without that you will never actually know whether your strategy works. It takes time for the market to realize the “correct” value of stocks sometimes, and during that time impatience leads to mistakes.

Let’s talk about one of my mistakes from the recent months. First though, let me give you a short introduction to my investing strategy.

My strategy in 5 key points:

1. Find companies with zero (or almost zero) long term debt that produces significant free cash flow (FCF).

2. Find companies that have management with a track record of significant return on invested capital.

3. Find companies that have had a downturn in value that does not meet the future (5 year) projections of profitability.

4. Find companies that have a market cap that warrant at least a doubling in valuation without significant changes in their business model.

5. Find companies that present new or industry changing technology/aspects that could disrupt other major players in the market place.

Okay, so those all sound super easy to find right? Of course not. That is why it is difficult and I make very few moves in the portfolio without a large amount of research and due diligence. That being said, I do not always look for the company that I am purchasing to have all five of these variables, but instead have at least 2-3 of them at the minimum. If I find 4-5 I will buy hand over fist.

So back to my mistake:

There are always some things that you kick yourself for, mostly mistakes of omission in my portfolio, but sometimes because you sell off before your thesis can come to fruition. For myself, this happened with two companies, VAALCO Energy (EGY) and Cleveland Cliffs (CLF). Both of these companies I purchased significant amounts while there was a downturn in early 2020. I had a target for these, new what my valuation target, and felt very comfortable in my holding.

Well here comes the election and I was up large on both of these holdings. Even though they did not hit my target yet, I sold half of each holding due to the uncertainty that I had around election time.

What happened post election?

Both increased substantially and I lost out on significant gains for my portfolio.

Why did this happen? Why did I miss out? Simply because I did not trust my investment thesis and follow it until the end. It is nothing more complicated than that.

Until next time, happy investing!