[MUSIC] So in this third and last video, we're going to have a look at some fundamental factors you should use when you want to make a decision to sell. And basically, get away from this temptation to trigger your decision to sell based on the return you've generated with your investment or the lack of return you've generated if the position enters into a loss, okay. The first criterion you can use to assess whether a stock is becoming too expensive, the share price of the company is becoming too expensive, is the famous P/E ratio. The share price divided by the earnings per share. It's basically defined as the total earnings the company has generated divided by the number of shares outstanding. At 60 times, as we see here, you see the price evolution of Nokia in red on the left-hand scale, and in blue, it's the P/E ratio on the right-hand scale. And you see that when the stocks hit, here we're not at the peak, we are close to the peak, we're at the 45. And you see here that already, at the end of 1999, the P/E ratio hits 65 times. So we're paying the company 65 times earnings. So this actually means that if the company was distributing all its earnings to its shareholders, so the payout, the ratio as we say in terms of dividend would be 100. It would take 65 years for you to recoup your initial investments, based on this, so very long, so indeed, very expensive. So, two ways to assert that the company is a bit risky and the stock is becoming too expensive. The first one, you basically just look at the history of this P/E ratio, and you compute an average and you see it's this green dotted line here, and you see that it's around 24 times. So normally a company like Nokia over its history, the P/E ratio is 24 times. Here, it's more than 60 times, a bit expensive. An even better way to access that the company has becoming overvalued is to look at a similar measure, the P/E measure, but for a whole sector, or it can be even some competitor. Erickson, at the time, that was a comparison which was made. And here, we use the Telecom sector, P/E, which is in green. And you see that it's roughly 28 times, so you are paying three times more. Nokia is three times more expensive than the sector. So at which point, what you need to ask yourself is, is it justified to pay three times more for a company like Nokia than the average or the sector? This is a key question. This is the kind of thing you should look at when you want to exit a position, not the return you generate with your investment. Because this idea, with this strategy, the problem is that you sell too early a winning stock and you keep too long a dog, or a loss making investment. We saw when we talked about animal, a dog is a stock that does nothing and you just wait, and you just wait, wait, and wait. And we'll see an example of that, which is the wrong attitude to do. Okay, so basically, the comparison of the P/E of Nokia to the one of its sector can give you a useful hint as to whether the company is becoming too expensive or not. And this is what should motivate your decision to sell rather than the returns you've made with your investment over history. And indeed we can see with the following chart that it was a bubble. The PE of Nokia went through the roof, the stock collapsed here when the dot com bubble burst, and you see that the stock price went from 60 to 20 and even less. Today, it's at 5 euros, and you see that the P/E went back to the average given by the sector. So in conclusion, with these three videos, what I wanted to highlight is we tend to make a mistake of paying too much attention on past returns, both for buying and for selling. We made the typical mistake of looking at the past returns and say wow, what a fantastic investment. And so we enter into a position well, maybe a start which has been performing well or too well already. And again, we decide to sell. We may decide to sell a winning position just because we made 30% on our investment. But that's no rational decision because maybe after that, and we see with the example of Nokia in the 90s, the stock just goes through the roof, and 30% is just nothing when you're making more than 100 times your initial investments if you buy the company in 1991. Okay, so we make an investment because it's been performing well, we exit a position because we made a decent return, these are the typical mistake. And again, the very important mistake we make is that we have this bias of refraining from exiting a loss-making position, and we should not have that, and I'll show you that in a minute with one last example. So basically, the message of these three videos is that rather than focusing on past returns, we should focus on fundamentals. You saw with the video of Philip Valta, my colleague, how we should value a company. We also saw that with the videos of our corporate sponsors. We may have, obviously, there are no perfect signals, but we have useful factors that we can use, useful variables that we can use to assess whether a stock is becoming too expensive and whether we should sell. So, focus on fundamentals, sector evaluations, look at the company. We know with Nokia, the problem with Nokia, at some point, it missed completely the turn to the smartphone. It relied on a system called Symbian, and it was outdated compared to the OS system of Apple, and that's when the stock just collapsed and went to the five euro we know today. So one very last example I want to show you is this one. This is an equity market which goes, you see here, from 7,000 to just under 40,000. I'm sure you will have recognized, this is the Nikkei. Just imagine, you have the bad luck of entering into this equity market when it hits the peak of just under 40,000. So you're making a loss if you have entered at 39,000, obviously, or even at 30,000, okay? So, if you don't want to sell just because you're under your purchase price, you're waiting. And you've been waiting now for [LAUGH] more than 20 years, and how long should you wait more, I should wait for another 20 years? And I bet you, what you're going to do if you have that kind of position, you wait, and the stock market recovers, and it goes, and it hits your purchase price, and what will you do then? You will sell, you will exit. Finally, my head is above water, I can sell. And this may be completely wrong because this may be the initial, the start of a fantastic bull market on the Japanese equity market. So wrong decision to keep an investment which will have made no return maybe for 40 years, you're much better off to sell, cut your arm and make something different with your money. So I give you one final hint to act and to stop acting on past performance to exit a position or even to buy and overfocus on past return. Basically, the way I do it, I put all my positions in an Excel spreadsheets, and I put the purchase price just when I buy the stock, and then I just delete the column. And I try to remove from my memory the cost price or even the purchase price of my investment because I don't want to be biased by the fact that I bought Nokia at 30, and now it's 60. I should have sold and now it's gone down, it's at 20 or at 10, what should I do? I want to forget the fact that I bought at 30 because I want to look forward and not in the rear view to drive my future returns. [MUSIC]
