Imagine yourself as an investor holding shares in ABC company at an average price of $10, which you have bought at a reasonably fair price based on your conviction. You see the stock price slide downwards to $9.50 in the short term and you managed to convince yourself that you are a long term investor. A couple of months later, the stock price trend upwards (and above the entry price) to $11. You pulled out your spreadsheet and a 10% gain is staring right in front of you. You hesitate a while and look out for news around to see the outlook of the economy. Heck, there is going to be some projected problems in the next few months ahead, let me lock in the gains first, keep them in my watchlist and re-enter them again when the price has gone down lower.
This post is about finding out the beast-art of selling stocks and the right convictions or reasons to selling. This is not a debate about whether you have made the right choice to sell because this can only be proven on hindsight and there is no way anyone can tell you it’s right or wrong to do so unless things have happened.
A lot of books and value investing courses are focused on the art of buying but seldom do you see anyone touches on the action on selling. To me, I am not delusional to only buying. As an investor, I believe that we act as a business owner and every business has a valuation where there will be a point where the price is attractive enough to sell. It does not matter whether our term of valuation is subjective as long as our conviction to selling has led to the right justification to it.
Yesterday, I casually posted a question to one of my circle of close financial bloggers friends in the chatgroup. I just wanted to see the perception of what the majority of investors are thinking. I posted a question to see which of the following is the hardest as an investor:
1.) Entering into a position when everyone is selling and there’s blood on the street.
2.) Building up a core position based on conviction within a portfolio.
3.) Sitting on a fundamentally unchanged business fundamentals and seeing a rising share price.
Majority of the choices led to choice number 3 because the temptation to take profits is there, akin to putting a gambler who has promised to quit gambling in front of the gambling table and do nothing. There’s a reason why many investors sold their winners too early while holding on to the losers too long.
The recent market surge has provided a very good opporunity for investors to exit positions at a gains to lock in profits. I’ve written about the “half-half philosophy” in my previous post (here) to substantiate this point. The decision to sell should ultimately be wrapped upon your end goals, not for short term gains. This is the reason why we need to have a clear investment thesis when buying and that is to ensure that we do not engage in emotional trading in the short term. Sell only when these investment thesis are broken, either because the fundamentals are weakening or valuations are too high.
I am taking the below graph from my good fellow blogger, Jason (who blogged here) who illustrate this point. This is not to point out that divesting shares at a 20% or whatever it is is not fantastic, but to have a clear investment thesis and effective investing strategy because you never know if the fundamentally great stock you are selling will ever go back to a price lower than what you are selling at. If so, are you saying that you forego a fundamentally great business and start to look on for a new business with the same level of fundamentals but undervalued? A wonderful business with strong economic moat is usually very rare to come by, so I wouldn’t be sure if I am willing to divest that for a mere 20% profits or so. Think yourself as a business owner and you get a better picture.
I’ve been a victim more than once now caught in this situation when I sell a fundamentally good stock in Boustead at a sub-par of $1+ and it has gone up ever since. This is not to say that it won’t go back to where it was but the chances are highly unlikely unless the fundamentals dropped massively or the economy is tanking because of severe depression. Even so, my investment thesis for the stock would have changed too.
Questionnaire
I’ve been thinking of coming up with an informal sort of questionnaire for myself whenever I contemplate to sell something. This may not be comprehensive but I think these 10 questions allow us as investors to think through the whole end to end processes from buying to selling.
1.) What is the rationale behind the reason to sell?
2.) Are the fundamentals weakening? Has the fundamentals changed?
3.) Are the valuations too high compared to peers or historical average?
4.) Would I be a buyer at current price?
5.) Are there better alternative investments I can allocate the capital to?
6.) Was it driven by fear of the market/economy/news?
7.) Are the companies exposed to product or market cycle upturn and downturn?
8.) Are the companies still responding to positive catalyst news?
9.) Are the companies or management doing share buyback?
10.) Am I selling (not selling) because my average entry price is low (high)?
Final Thoughts
Just like buying, the decision to sell is ultimately personal.
As long as we’ve think it through and the decision doesn’t get emotional, we should be able to make a more rationale decision than we would have if otherwise.
As you might probably realized by now, our behaviors and decisions drive whether we ultimately end up with a great investments or not. We’ll be far more successful investing in stocks generating average returns than we will with the highest potential returns but with bad investing habits and behaviors.
What do you think? Do you agree or disagree? Which of the 3 choices you think would have been the hardest for you as an investor?
It is easier to buy. There is still some hope.
Holding to a winning stock is difficult.
Holding to a losing stock is easier.
We scare to lose. Hard wired in us.
Hi Uncle Cw
Buying is mostly the beginning (unless you are shorting) so its usually easier. Selling is the other side of the end, thats when our stamina is losing steam 😀
It’s really very educative stuff that you shared here! According to my professor Aloke Ghosh, one should make investments quite carefully. If you are a beginner investor then you should take expert advice.
Thanks Rebecca!!!
Hi B, for me, the hardest will be #1.
😉
Hi Richard
To be fair all 3 are hard there so its good to know you have different choices than othwrs.
Well said, B! Thanks for sharing.
Hi SeeKay
Good to see you here 🙂
Thanks for your kind comments.
Hi B,
More list of questions and ending with Final thoughts as always nowadays. I like it! 🙂 Very interesting and good article.
For me, it depends on what type of stocks category you have in your portfolio. My style now is still diversify, because frankly I am amateur. I hav no stomach to digest too much losses in one stock!
I use to think sell @high and buy back later when low! I was never very successful at this. Cyclical stocks maybe yes!
Dividend stocks, I asked if it achieve my target dividend yield? bake in share price changes
Those stocks u tick for long term, w/o much changes to fundamentals, should just ignore and go to the beach….
See my post on Contrarian recommendation of when to sell..
http://www.rolfsuey.com/2014/06/when-to-buy-hold-and-sell-stock.html?m=1
Hi Rolf
Thanks for your sharing and kind words.
Selling and buying back lower has never been a successful strategy for me as well. I usually see them fly far far away. HA!!! For dividend stocks I try to monitor and compare with the risk free rate bonds alternative to see if they warrant the difference.
Hi B,
Thanks very much for mentioning my blog, really appreciate it!
I'm a very big fan of having your own personal checklist, and really like the questionnaire you've put together. The mental games we play with ourselves really are the hardest part of becoming a successful investor, and a checklist like this helps you avoid being tempted to make decisions based on emotions. It also helps build strong habits and behaviours which definitely has a much bigger impact on your long-term success than picking the right investments.
Cheers,
Jason
Hi Jason
Thanks for allowing me to input your graph there. I think you've substantiated well in your posts.
News forums and to some extent blogs do confuse and tempt people to go with the flow. It's not necessarily a bad thing but unless the investoe is strong enough to control the emotion it'll be hard not to follow the heed or advice.
Hi B,
I think as hard as it is to find the right price to buy a stock, it is much harder to know when to sell the stock. This is a skill I am trying to work on now – selling my holdings at the right time. Finding the right balance between stocks that grow and pay good dividends is very tough in the strong economy as well.
I look forward to more reads.
D2R
Hi D2R
Thanks for visiting 🙂
Selling is indeed a tricky skill to have because they are placed at the other end of the spectrum from buying and they get all sorts of influence from the moment we purchased the stock.
For example I encounter a few friends who refuses to sell simply because his average buy price is high and would rather wait out to break even. Just not right I feel.
HI B,
I like this article, got questionaire. Of the 3 choices
1 is the easiest relative to the three (Personally),
2 is the hardest as I subscribe to diversified port theory.
3 is in the middle.
I think 3 really depends. 2 months ago, I subscribe to the (almost) fully vested theory and just ride the ups and downs since I also believed in the (no one can time market theory)
Now, looking at my situation, I would want a big emergency fund more than anything else.
So, I am consistently taking profits off the table, I would take even more profits off the table if STI really cheong and some of my counters give me returns of 20-30%.
But given I have already liquidate half of my port, when someone ask me if I will take profits for sembcorp and ST engineering, I say I am in no rush. NOt just because they are someway off the abritary returns of 30%, but also I no longer fear a bear or significant correction now, knowing my balance "shit" smells better now.
As the general moves upwards, one gets more apprehensive, and wonder what else is not priced in.
Looking back, Venture, was it a good call to lock in profits? If market is not at a high, I might have hold longer. But I reminded myself no company is evergreen.
2014 is a year not just devoid of bear but also of corrections. the biggest correction is 6% and it happens in US, singapore market is yawn….
If my balance sheet is much stronger, decisions will be different too, much like how a retired, a young single worker and a recently married couple expecting a child would view finances differently.
Hi SI
Thanks for sharing your choice. You are so far the first person that submitted (2) as your answer so it shows how different choices of people can be in difderent circumstances.
I get what you are saying. Now that you have liquidated more holdings than before your portfolio allocation looks much more balance now which is why the fear has been reduced. This way regardless of where the bull or bear goes you will be able to take either advantage of the situation. Of course in your case I understand that you need to do that for personal reasons so totally the right thing to do imo.
No matters how much we read from books or cyber world; we still can't understand down to our heart. We can only truly learn from our own experience or from close relatives or very close buddies when we see how they are hit.
Its sad though to see family relatives friends or strangers getting caught in situations where it affects the family or health.
I agree 3 would be the hardest. But if the company is really good, maybe we should just let it be… and let the price rise.
1.) Entering into a position when everyone is selling and there's blood on the street.
2.) Building up a core position based on conviction within a portfolio.
3.) Sitting on a fundamentally unchanged business fundamentals and seeing a rising share price.
I like that you wrote an article on selling. Many books don't write much about selling and focus a lot of the buying. I did not understand why at first but recently, as I change the Bf Gf Portfolio towards stocks that I can hold for 10 years, I start to realise why this is so.
Perhaps when you buy a stock, the business must be so good that its value can continue increasing for >10 years. The only time when you sell it is probably when it fails to meet that criteria.
Hmm… hope that made sense…or is it too simple? Hahaha!
Hi Bfgf
Thanks for sharinf your choice.
The book that you read, the intelligent investor, which I am akso reading every now and then, advocates that selling a stock should only be justified when fundamentals have changed for the worst. I can understand why they are not bothered about selling because these people enter the purchase with a wide margin of safety with a long term horizon that the business moat will get stronger and shareholders value will increase.
Good book and mindset definitely.
As the market going to be volatile for until at least July, there will be many people going to be panic sell, and buy.
I hope there won't be another 2008-march 2009, where people just "sell first, ask question" later. Even if you do this, you might stand to lose some money, as the money will not deposit back to your account to buy again.
Buying and selling without a plan can be dangerous too.
Hi Vivianne
I'll doubt we'll go back to a 2008 case scenario.
I think these people who sell first might be tempted to buy them upon a 5% correction but it'll be hard to predict either up or down.
There are times when some of my stocks give me a 20-40% gain. I would lock in the profits to recoup my capital. Thus the remainding holdings is sort of 'free'.
Hi EH
I've heard of that freehold stocks concept from a fellow blogger. I think it's a valid proposition as it allows you to partially divest some while waiting for the "free" stocks to take on higher risk (and return).