In this segment from the Rule Breaker Investing podcast, David Gardner answers a question that nearly every investor will face at some point: How do I know when to sell? His querier has a small-cap Rule Breaker stock that has taken a turn for the worse, price wise. What he's unclear about is whether the impetus for its dive is short- or long-term problem, and he's in need of guidance on how what in the conference calls and earnings reports might tell him if it's time to cut his loses. Gardner has a couple of thoughts on the matter.
A full transcript follows the video.
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This video was recorded on Nov. 29, 2017.
David Gardner: Mailbag Item No. 3: This one comes from Mike Strain writing from Claremore, Okla. I always enjoy it when people include where they're writing from so thanks, Mike.
Mike says, "I started listening about a year ago. Really enjoy the podcast. Great mix of investing insight, interviews, and practical information. Love the series on great company culture." Thank you, Mike! Thanks for all of it.
"Now onto my question. I own shares of a Rule Breaker that had a 34% drop in one day last week." I'll just insert "Ouch!"
"I expect volatility with small companies and that painful drop seemed justified with the earnings miss." Well, that's a very mature thing to say. "But after listening to the earnings conference call, I had concerns that this small-cap company may be facing long-term problems. Are there specific things in conference calls or earnings reports that make you pause and think, 'I may need to consider selling this one? Thanks for considering my question."' You're welcome, Mike. Thanks for your question. I'll give you two, quick thoughts on this.
The first is when I'm listening to a conference call or just reading what people are saying online in an earnings conference call, I often listen for whether we're hearing what I'll call "corporate speak" or, by contrast, an authentic human voice. This is not a fail-safe, catchall panacea for avoiding all kinds of mistakes by holding or not holding onto a stock that has been downed badly.
But when I hear from real people real language explaining the mistakes that they made, the problems they have... When the Domino's Pizza (NYSE: DPZ)Â CEO comes on and says, "Our pizza's just not good enough. Let's face it. We need to fix that," that kind of talk makes me feel really good about continuing to hold a company. Whereas if I'm just hearing the CFO read the boilerplate in front of me, and not really address what's happening with the company or try to put a good face on it, then I'm less likely to hold.