Let’s say you buy an On Sale stock and that stock quickly changes to Watch or Overpriced and the stock drops below your cost basis (buy price).
Relax. This happens and don’t freak out.
If you own a stock that changed from On Sale to Watch or Overpriced and the stock is now lower than the price you bought it for, I recommend you do not sell as long as you apply the 4 M’s. Here are your next steps regarding the 4 M’s.
MOS: We already know the stock moved from On Sale to Watch or Overpriced. Just relax and move onto the Meaning.
Meaning: If you did your homework and understand the business, industry, and sector and you know this business will be around in 10 years, this is a good sign. Move onto the Moat.
Moat: If the business is hard to duplicate and has a strong competitive advantage such as a strong brand moat (like Microsoft) or cash moat (like Apple) this is also a good sign.
Management: If the business is run by a good leader that has a track record of growing publicly traded companies, this is another good sign.
Overall, if you see that the meaning, moat, and management checkout, then do not sell the stock. On the other hand, if you run the 4 M’s analysis and the future of the business is not looking good, then it may be time to sell and take a loss.
When I first started investing, this happened with ELY (Callaway Golf) and ROL (Rollins). Both of these stocks quickly went from On Sale to Overpriced and the share price dropped below the price at which I bought them for. I ran the 4 M’s analysis and made the decision to not sell and wait for those stocks to go back up. Guess what? They eventually did! It took about 6 months for ROL and 1 year for ELY but they eventually climbed higher than my buy price.
There are times we can enter a stock and the stock Summary happens to change soon after. If you sell the stock at a price lower than what you bought it for, you will lose money. I refuse to lose money so I run the 4 M’s analysis to determine if I should sell or hold.
Keep in mind, if a business has achieved an On Sale summary at one time, that’s a good thing. That means the business as the ability to achieve it a again.