Principles of Buying and Selling Stocks

In the business world, when management sells a business in its group, it means that that subsidiary is performing badly or is not making any profit. This is so that they can reduce the group’s loss, and keep only their rising star businesses to build more profits.

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As I wrote about Siam Commercial Bank BKK:SCB selling off its subsidiary, BKK:SCSMG to BKK:ACE Group, I thought of another aspect of this story.

In the business world, when management sells a business in its group, it means that that subsidiary is performing badly or is not making any profit. This is so that they can reduce the group’s loss, and keep only their rising star businesses to build more profits.

BKK:SCB has an insurance business BKK:SCSMG and a life insurance business BKK:SCBLIF If we look at these businesses’ financial statements, we can see clearly that BKK:SCBLIF has much better economics, is able to generate constant profits, and is much more predictable than BKK:SCSMG

https://www.jitta.com/stock/bkk:scblif

http://www.jitta.com/stock/bkk:scsmg

If we look at the Historical Jitta Score of BKK:SCBLIF, we will also see that it has always been more than 5 every year, whereas BKK:SCSMG ’s scores have always been lower than 5 every year. This also includes other indicators like Jitta Factors and Jitta Signs -every indicator of BKK:SCBLIF is better than BKK:SCSMG. This reinstates that BKK:SCBLIF greatly outperforms BKK:SCSMG.

So if you were part of BKK:SCB’s management, which business would you sell and which would you keep?

The answer is blatantly clear. We should obviously sell BKK:SCSMG and keep the better business of life insurance like BKK:SCBLIF.

Of course, that is what BKK:SCB did. In 2011, they finally bought back about 40% of BKK:SCBLIF from New York Life, making them the biggest shareholder with 94.66%, while in 2013, they decided to sell all of BKK:SCSMG to the BKK:ACE Group.

This is the right move to make, in terms of doing business: sell the bad business out, and keep the good business.

It’s a very simple business mindset. But when it comes to the world of investment, people tend to forget this simple logic, and even do the opposite! Why? Most people sell stocks that are making high profits, because they think that they will gain once they sell them. And they tend to keep the stocks that are still making losses, because they cannot bear to sell these stocks at a loss, still hoping that one day, the price would turnaround.

Making decisions such as these will cost us in the long-run. Because our money would be sunken into bad businesses, instead of being invested in good businesses and growing with them.

So as Warren Buffett stated, “Anything that makes sense in the business world will make sense in the world of investment, too.” We should decide whether to buy or sell stocks under the same mindset as we would make business decisions: When we buy or sell stocks, do not fixate on the profit/loss from the stock price, because it does not really tell us much. What we should do are:

  1. Analyze the quality and value of that business
  2. Keep holding the stocks of rising star companies
  3. Sell stocks of badly performing companies

In the long-run, our overall investments will grow with the value of these businesses. Remember that almost every billionaire in the world have built their fortunes by holding stocks of only a few good companies.

In the cases of BKK:SCBLIF and BKK:SCSMG, we will see that the business valuation and the stock price reflect their performance. BKK:SCBLIF’s value increased 5-folds in the past 6 years, while BKK:SCSMG’s value barely increased from 2007.

Therefore, if we held these two stocks at any point in time from 2007, no matter how much the prices are or the profits are, the right investment decision would be to keep BKK:SCBLIF and sell BKK:SCSMG, a decision we would make if we were BKK:SCB’s management.

But the best case if you look at the Historical Jitta Score, would be to not invest in BKK:SCSMG in the first place.

P.s. Investing is very simple, really. But before Jitta, it is considered quite hard, because you would have to analyze all the different businesses and constantly calculate their value to make your decisions.

And that is why Jitta was developed -to enable normal people to make investment decisions like they would do when buying a business. We strive to help increase your returns and, importantly, to help ease your concerns so that you can invest happily.

Author: Jitta

Jitta simplifies financial analysis for value investors and financial advisors alike. Our stock-analysis platform offers actionable advice to help them make better investment decisions and generate higher returns based on a simple principle: “Buy a wonderful company at a fair price.” And we do that by creating Jitta Ranking, our proprietary algorithm that ranks stocks based on their profit potential. Returns generated by Jitta Ranking since 2009 has outpaced that produced by the S&P500 index by a large margin. Jitta’s technology processes information like a human mind, assessing complicated data and digesting it into an easy-to-use and intuitive format. Its key features include Jitta Score, an indicator of a wonderful company; Jitta Line, an indicator of a company's fair price; financial statements-made-simple Jitta FactSheet; Jitta Playlist, an intelligent screener and backtest system in one; and Jitta Portfolio, a smarter investment-tracking mechanism.

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