Buy, Hold, Sell?
Something simple or complex?
The other day, I posted some quick thoughts on creating letter grades for stock metrics. I received three separate rounds of feedback from readers on this that had me thinking quite a bit, so I’ll share two key themes from those thoughts.
What are we trying to do?
One of my biggest weaknesses (and this is probably a decent answer to that dreaded interview question) is that I am into trying things first and asking questions later. I like to tinker with different models and ideas but don’t always step back and ask what I’m actually trying do. Sometimes that’s not a bad thing though because by following down those paths of curiosity I find answers to things I didn’t even know I wanted to ask.
In terms of letter grades then, I haven’t even defined what they are suppose to do. Is the ultimate goal outperformance? I suppose so given that this is investing. If that is the case then shouldn’t I prioritize the metrics with the biggest relationship to price?
While I may not know what I want to prioritize for grades what I do know is that I cannot prioritize anything if I haven’t determined the guiding plan for what I’m trying to do.
Why not use conventions already in place?
I was asked by one reader if I shouldn’t just use a buy hold sell approach, as that is fairly standard. It also is a useful framework because metrics could determine stocks to buy or sell and then stocks where the data is potentially not strong enough to have an opinion.
To this I would say that I’m not really in the business of saying to buy or sell something but rather that I want the metrics to easily tell us a story quickly (e.g. here are stocks with the best growth of the best cash flow etc.). But, then what is the point of the grades in terms of outcome (which is basically the same as the question we just raised).
In conclusion, I don’t really have a conclusion. I just wanted to share some of what was in my head since the last time I did that. Anyways feel free to share your thoughts on these thoughts just as we did on the other post!