Have you ever sold a stock for a solid win and then watched it fall back to Earth? If you have been investing for long enough, the answer is probably yes. Over time, your watch list may accumulate many former positions, and you may even buy old winners back. Though it can be exciting to see the old return anew, the addition of past holdings to a current watch list can be something of a mixed blessing for investors – or at least this is what I have found.
On the one hand, I know my former holdings better than corporations I come across for the first time. When I’m thinking about investing in one of these former holdings, the learning curve is shorter, it’s relatively easy to catch up on the story, and I have an idea of what is driving the stock’s performance. The 10-Ks, 10-Qs, MD&As and other filings are easier to read, and I have a good sense of how the balance sheet and other financials should look. Moreover, the valuation work is often already semi-roughed-in.
On the other hand, taking shortcuts like these in the research process may hinder overall portfolio returns and give investors an inaccurate picture of what are truly the best investment opportunities. In the past, for example, I have found myself biasing toward previous holdings more quickly than new companies, because the analysis process is so much faster. This is especially true if the stock was a big winner for me, as it’s easy to imagine another lucrative trade. Regardless of the psychology driving these biases, it’s important for investors to lean away from this tendency, assess each opportunity independently and scrutinize evenly.
For me, recognizing this bias was the first step in addressing the problem. Since I became aware of it, I have made a point of researching past positions last. That way I will know the new names on my watch list well by the time I get to the old. I am also careful to avoid skipping steps in my analysis of former companies, even though I know them better than corporations fresh to my watch list. These simple steps help put new candidates on a more even footing and work against my natural bias.
First Busey BUSE-Q exemplifies this issue for me nicely. I purchased it in 2012 and 2013 for an average price of $14.03 and held through to 2017, when I sold it in two tranches for an average price of $30.44, generating a respectable return of 117 per cent, plus dividends along the way. First Busey was one of nearly a dozen regional banks that we Contra Guys bought in the aftermath of the 2008-9 financial crisis, and we were very comfortable owning the sector.
In the years after my exit, I had little interest in it, but in early 2020, during the COVID-19 stock market collapse, BUSE briefly appeared on my watch list again before rallying through 2021 and 2022. This year, it has landed back on the register, in part because of the collapses of Silicon Valley Bank, First Republic, and Signature Bank. First Busey’s price-to-book ratio is 0.85 times, versus a 10-year average of 1.31, and the ticker is currently around $19.50, which is where it traded for much of 2020, and 2015 before that.
When First Busey reappeared on the watch list, I was pleased to see it there and thought fondly of how well it had done for me in the past. I then included it in a list of about a dozen other banks for consideration, but – true to my process – I made sure I appraised it last. By the time I started to assess BUSE, I knew the other regional banks on my watch list very well. I was also careful to put First Busey through all the same paces I had put its peers through.
When all was said and done, First Busey ended up near the bottom of my ranking when compared to the other banks analyzed. While it remains an interesting company and continues to reside on my watch list, there are just so many banks out there with more attractive financials, prospects, dividends, valuations and insider buying trends. It is uncertain if I will buy any financials this December, during tax loss selling season, when most of my purchases are made, but I can safely say that if a regional bank is acquired, it is unlikely to be First Busey.
So, if at times you find yourself gravitating toward past winners that have re-emerged on your watch list, remember to take a step back. Scrutinize them as you would a new stock you have never assessed before, and consider analyzing them last to put the favoured name on an objective and even footing with other watch list candidates. The process may uncover better investment opportunities, and help your portfolio returns.
Philip MacKellar is a writer for the Contra the Heard Investment Letter.
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