In 2020 the market was somewhat disconnected from reality. Happy times may not last. If the market turns bearish, are you prepared? Ask yourself these questions to prepare for unexpected turbulence. It’s better if you actually do the homework on paper or spreadsheet and write down your answers in your personal notebook or journal.
- What is the fair value of each company you hold? Are each of your stocks trading above or below their fair value?
- Why are your companies trading at their current market prices? What do others believe about the company that is driving the current market price?
- What is the most bearish case that can be logically made for each of your holdings? What has the company done that would halt that bearish case and bring about a recovery?
- What is the maximum possible value for the company you are holding? If they capture 30%, 50%, 85% of the market or whatever is reasonable for their market space, and have great margins, what is the upper limit on the value of the company?
- If the equity markets were to shut down tomorrow, and not re-open for 10 years, what would happen to you? Would you freak out? Which of your current holdings would you be happy with?
- If your company, the one you think you like holding, were to drop 99%, would you buy more of it? How much money would you commit after it fell 99%? If you had the cash to buy all of it for 10% of its current price, would you want to take it private and own the whole thing?
- If all of your stocks dropped 50% tomorrow, which would you sell? Which would you buy more of? Why would you make that decision in each case?
If you don't think a stock is worth holding for a month without checking the price daily, then what are you going to do when it does something really surprising?
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