Showing posts with label Selling mistakes. Show all posts
Showing posts with label Selling mistakes. Show all posts

Saturday 2 March 2024

Selling is often a harder decision than buying

 

Selling is often a harder decision than buying

"If you have bought a good quality stock at bargain or reasonable price, you can often hold forever." 

Investing is fun.  For every rule, there is always an exception. 

The main reasons for selling a stock are:

1.  When the fundamental has deteriorated permanently,  (Sell urgently)
2.  When it is overpriced, whereby the upside gain will be unlikely or very small and the downside loss will be big or certain.

We shall examine reason No. 2 through the property market.  The property market is also cyclical.  There were periods of booms and dooms. 


If you have a good piece of property that is always 100% tenanted and which gives you good consistent return (let's say 2x or 3x risk free FD rates), would you not hold this property forever?  The answer is probably yes.

Then, when would you sell this property?

Note that the valuation of property, as with stocks, is both objective and subjective.

Would you sell when someone offered to buy at 500% above your perceived market price?  

Probably yes, as this is obviously overpriced.  You could cash out and probably easily re-employ the money to earn better returns in another property (or properties) or other assets. 

Would you sell when someone offered to buy at 50% above your perceived market price? 

Maybe yes or maybe no.  You can offer your many reasons.  

However, all these will be based on the perceived future returns you can hope to get from this property in the future.  This is both objective based on past returns obtained and subjective and speculative on future returns.

However, unlike reason No.1 when you would need to sell urgently to another buyer to prevent sustaining a permanent loss, you need not sell just because someone offered to buy the property at high price. (However, there are also those who "flip properties" for their earnings; they will sell quickly for a quick profit.)  You will not suffer a loss but only a diminished return at worse.  You can take your time to work out the mathematics.  

You maybe surprised that you may still achieve a return higher at a time in the near future by rejecting the present immediate gain based on the present high price offered.  

Also, you would need to price in the lost opportunity cost when the property is sold at this price, even though it is 50% above the perceived normal market price.  Could you buy a similar quality property with the same sustainable increasing income or return by offering the same price?



Similarly, the same line of thinking can be applied to your selling of shares.  

When should you sell your shares?  

Yes, definitely when the fundamentals have deteriorated permanently.  The business has suffered for various reasons and going forward, the earnings will be permanently impaired and deteriorating.  

Yes, when the price is very very overpriced.  However, you need not sell your shares in good quality companies that you bought at fair or bargain price.  As long as the fundamentals are strong and the business is adding value, selling now at a higher price may mean losing the return that you could have obtained in the future years from owning this stock and the opportunity cost of reinvesting the cash into another stock of similar quality and returns.  

Once again, the importance of sound reasoning and doing the mathematics in making a decision whether to sell or not.

Is it not true, that the really big fortunes from common stocks have been garnered by those
  • who made a substantial commitment in theearly years of a company in whose future they had great confidence and
  • who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?

The answer is "Yes."




Additional notes: 

Other reasons for selling a stock (or property) are:
  • To raise cash to reinvest into another asset with better return.
  • A certain stock (or property sector) may be over-represented in your portfolio due to recent rapid price rises and you need to reduce its weightage to reduce your risk of over-exposure in this single stock (or property sector).


Footnote:
 

This is a true story. A rich man was approached by a buyer to sell his property. A few neighbouring lots were sold for $1.6 m the last 2 years. What offer will ensure that you sell your property to me?  Please let me know. The unwilling owner replied, "$5 million". There is a lesson here too. :-)




Saturday 30 June 2012

The 100 Things I've Learned in Investing


As you'll see in No. 47 on my list, it's very important to step back and gain perspective. In an attempt to stop making the same mistakes over and over, here's my attempt to codify the 100 lessons I've learned in my investing career so far.
1. Most of this list is dedicated to insight on beating the market, but know this: It's darn hard to beat the market. Ninety-nine percent of people are best served steadily buying and holding low-cost index funds at the core of their portfolios -- and I may be understating that 99% figure.
2. Looking for a one-stop index-fund core? For a very reasonable 0.2% in fees a year,Vanguard target date retirement funds will automatically diversify and balance the stock and bond portions of your portfolio -- just pick your retirement date. The Vanguard family of index funds is what I recommend to just about everyone who asks.
3. Being contrarian doesn't just mean doing the opposite. The "contrarian" street-crosser gets run over by a truck.
4. In any financial matter, find out what the other person's incentives are. Discount accordingly.
5. Even a gut investment call should have some numbers to back it up.
6. Mistakes made in your 20s are better than mistakes in your 50s. Mistakes involving $100 are better than mistakes involving $100,000.
7. My all-time favorite Warren Buffett quote: "We like things that you don't have to carry out to three decimal places. If you have to carry them out to three decimal places, they're not good ideas."
8. Never buy stocks on margin, no matter how "can't miss" the opportunity is. That blend of leverage and arrogance is exactly what gets Wall Street in trouble. The difference is that we're not too big to fail.
9. Don't waste time mastering things that simply don't work (see lessons 10 through 12).
10. Example No. 1: day trading. Like playing roulette, you'll have some victories, and you may be able to fool yourself into thinking you're skillful. The house just hopes you keep playing.
11. Example No. 2: technical analysis. The only chart pattern worth noting is the jagged, but likely downward-sloping line of your savings if you follow this technique.
12. Example No. 3: leveraged ETFs. Bastardized ETFs like the Direxion Daily Financial Bull 3X (NYSE: FAS  ) are another great way to lose money. Even if you guess right on direction, the mathematics of the daily reckoning mean these instruments are long-term losers.
13. Stock stories about growth potential (e.g., tech stocks) are sexier than stock stories about track record (e.g., consumer goods stocks). Only the latter are verifiable today, though.
14. Having a strong opinion (let alone acting on it) is overrated. Knowing 20 stocks cold beats being able to challenge Jim Cramer in the lightning round.
15. Albert Einstein allegedly declared compound interest "the most powerful force in the universe." High-interest credit card debt aims that force at your wallet. To get compound interest pointed in the right direction, save (and invest) early and often!
16. A casino makes us use chips in lieu of cash, partially because we forget that the chips represent real money. Stocks may act in screwy ways and invite us to play games, but as investors we can't lose sight of the fact that stocks represent real companies. As Peter Lynch puts it using a different gambling analogy, "Although it's easy to forget sometimes, a share is not a lottery ticket ... it's part-ownership of a business."
17. When talking to other investors, have your BS detector handy. When you hear their "big fish" stories, know that their brilliant track records likely have more to do with selective memory and poor scorekeeping than skill.
18. A great Buffett reason not to fudge our taxes: "We'll never risk what we have for what we don't have and don't need."
19. Those who know what they're doing make complexity seem simple. Folks who don't (or are trying to sell you something) make simplicity complex.
20. A clear sign of the latter: jargon.
21. Asset allocation is more important than stock picking. A silly example: Say you're holding a race among five horses and five human beings. Many investors spend their time trying to rank the five human beings, when they're better off just betting on the five horses.
22. If you don't understand it, don't buy it until you do.
23. Sigh -- hard work is required to beat the market. Per Peter Lynch: "The person that turns over the most rocks wins the game. And that's always been my philosophy."
24. On the plus side, the results of hard work can be breathtaking. In his book Outliers, Malcolm Gladwell gives example after example of people we term "geniuses" who are really hyper-dedicated people who work at their craft relentlessly. Among the examples he uses are Bill Gates and the Beatles. He argues that both got to where they got because of the opportunity (and inclination) to hone their skills for 10,000 hours. That's the equivalent of five full years of work -- or 1,000 weeks of practicing 10 hours a week.
Gates had access to an ultra-high-end computer terminal because his exclusive middle school started a computer club. In high school, his access went up a notch as he gained access to the computers at the University of Washington. He talks of getting 20 to 30 hours of programming time in each weekend. On weeknights, he'd slip out of his house to take advantage of the open time-sharing slots from 3 a.m. to 6 a.m. And the Beatles were just as obsessed. By the time they broke out on the Ed Sullivan show in 1964, the Beatles had played an estimated 1,200 shows, some lasting eight hours!
25. None of the time spent checking and rechecking Yahoo! Finance portfolios counts toward those 10,000 hours. And here's the real kick in the groin: 10,000 hours is a prerequisite for mastery -- not a guarantee.
26. Common sense is as uncommon in investing as it is in real life.
27. One of my favorite lessons from the poker table: Action is overrated. The best players (and investors) are constantly weighing the opportunities, but rarely are they moved to act.
28. A similar sentiment by Vanguard founder Jack Bogle: "Time is your friend; impulse is your enemy."
29. Selling is overrated. Reason No. 1: We often sell potential multibagger winners that would more than make up for our losers. The greater the quality of the business, the greater the danger of selling too early.
30. Selling is overrated. Reason No. 2: Outside of retirement accounts, selling kicks in voluntary taxes.
31. Selling is overrated. Reason No. 3: Fees.
32. In the hands of a good storyteller, almost every stock looks like a winner. Assume you're not hearing the whole story.
33. A question to ask before buying a stock: "What's my competitive advantage on this stock? Do I really know something the market doesn't?" The more specific the advantage, the better.
35. Most of us are too enamored with "so you're saying there's a chance" opportunities. A Hail Mary belongs on the gridiron or in the pew -- not in the brokerage account.
36. A great rule of thumb for buying a house (the biggest single investment most of us will ever make), from fellow Fool Buck Hartzell back in 2005: "If a home is selling for 150 times the monthly rent (or less), it's generally a good deal. If it's selling for more than 200 times the monthly rent of a comparable property, you're better off renting."
37. One of the toughest facts about investing is that a proper track record takes decades. Charlatans can do quite well for years and years. This is potentially dangerous for our assessment of ourselves and of others. Focusing on process, rather than results, helps.
38. Price matters. A great company can be a great big loss for you if you pay too much.
39. When applicable, use the tax system to your advantage. Retirement accounts like 401(k)s and IRAs can be huge boons.
40. It is twice as easy to sound intelligent being pessimistic about the future as it is being optimistic.
41. Greater risk theoretically yields greater reward, but a stupid investment is just a stupid investment.
42. Sir John Templeton's quote: "'This time it's different' are the four most expensive words in the investing language." The details change, but the basic storylines remain the same.
43. Investing shouldn't be improv. Take the time to write a thoughtful script.
44. A key Buffett quote to understand: "Time is the friend of the wonderful company, the enemy of the mediocre." Why is this so? Partially because "you only find out who is swimming naked when the tide goes out." I really struggle to abide by this advice. I am often the Statue of Liberty when it comes to investing in inferior companies on the cheap: "Give me your tired, your poor, your huddled masses," etc.
45. Options promise big gains in short time periods. The problem? About three out of every four expire worthless. Contrast that with a stock, which doesn't expire.
46. Sorry, market timers: Take it from Peter Lynch, who said, "If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes." Or fellow investing great Ralph Wanger: "If you believe you or anyone else has a system that can predict the future of the stock market, the joke is on you." Or the godfather of value investing, Benjamin Graham: "It is absurd to think that the general public can ever make money out of market forecasts."
47. Keep a journal (or spreadsheet) of your stock picks, complete with your rationale for each move. Then look back on it to see if you were right. We may think we're good dressers, but all it takes is a high-school yearbook to prove otherwise.
48. Step aside, high blood pressure: Inflation is the silent killer.
49. Diversification doesn't entail making a whole bunch of dangerous investments and hoping they cancel out. That's the financial equivalent of stabbing your leg to cure your flu.
50. 13 Steps to Investing Foolishly is excellent.
51. Index ETFs may be the most wildly misused products in the stock market. They are excellent tools for ultra-low-cost buy-and-hold diversification, but many use them to day-trade the market (and sectors thereof).
52. Somewhere around 80% of actively managed mutual funds (as opposed to broad index funds) don't beat the market.
53. The more we learn about investing, the more we want to start doing exotic things (naked straddle options, anyone?) and buying stock in obscure companies no one has heard of. Maybe it's boredom, maybe arrogance, or maybe the desire to impress people at parties. Or perhaps it's seeking the glory of being right when few saw it coming. I'm guilty as charged on all counts. When I'm at risk of going off the deep end, I try to remember that stock picking isn't diving. As Buffett has noted, there are no extra points (or returns) for degree of difficulty.
54. This Einstein maxim is spot-on for stock analysis: "Everything should be made as simple as possible, but no simpler." Both clauses are crucial.
55. Just because a company or industry is set to change the world doesn't mean it's a great investment. Beyond looking at valuation, there tends to be a Wild West of players until a few winners emerge. In fact, market beater Ralph Wanger says, "Since the Industrial Revolution began, going downstream -- investing in businesses that will benefit from new technology rather than investing in the technology companies themselves -- has often been the smarter strategy."
56. Jumping from one flavor of the day to the next isn't continuous learning.
57. Long-tail events (a.k.a. black swans) are highly underrated. Nassim Nicholas Taleb explains it best in his book, Fooled by Randomness.
58. Every time I start getting cocky (which is often), I am unceremoniously reminded there are no sure-thing stock picks. As master investor T. Rowe Price noted: "No one can see ahead three years, let alone five or ten. Competition, new inventions -- all kinds of things -- can change the situation in twelve months."
59. I personally get way too excited when a stock hits its 52-week lows or falls 50%. Many sins are washed away in my mind when I see a bargain, but price movement by itself is not a sufficient reason to buy (or sell). Falling knives can be death -- especially when they're rusty and gross.
60. A related point: No one consistently times the bottom or top of a stock's price (let alone the market of stocks!).
61. Don't let the false modesty of investing greats fool you into false confidence.
62. My three strikes against gold. Strike one: Its value can't be estimated with basic math (since it just sits around producing nothing). Strike two: Wharton professor Jeremy Siegel showed that going back to the 1800s, the return on gold has barely kept up with inflation and is left in the dust by stocks and bonds. Strike three: Gold as a doomsday investment doesn't make much sense. If the apocalypse (financial or otherwise) actually comes, you're probably screwed regardless.
63. Discount cash on a company's balance sheet. Managements are brilliant at squandering it.
64. Done properly, value investing -- e.g., focusing on low-P/E, low-P/B, low-TEV/EBITDA stocks for ideas -- has proven to work quite well. But as successful growth-investor Bill O'Neil warns, "What seems too high and risky to the majority generally goes higher, and what seems low and cheap generally goes lower."
65. You may be too smart to be rich.
66. Know thyself. Know your weaknesses and strengths. Here's a specific example from Joel Greenblatt: "For most people, stocks should represent a portion of their investment portfolio because I still believe that over the long term they will provide superior returns relative to most alternative investments. However, whether that portion of an investment portfolio devoted to stock investments should be 40% of an investor's portfolio or 80% is a very individual decision. How much are you willing (or able) to lose before you panic out? There's no sense investing such a large portion of your assets in a long-term strategy if you can't take the pain when your chosen strategy doesn't work out for a period of years."
67. For some help on getting to know yourself, study the common mistakes behavior finance experts have uncovered.
68. Folks say that "success has many fathers, while failure is an orphan." Combine that with our willingness to overvalue streaks owing to one event, and I start to wonder: Do we overvalue managers that leave a successful organization to turn around a woeful organization?
69. If you just heard of the company yesterday, don't buy its stock today.
70. The Internet and better regulations have largely eliminated data advantages. The problem now is isolating which data is actually meaningful. Better results stem from increasing the signal-to-noise ratio.
71. Even if you rely on advice from others, heed the words of bond fund legend Bill Gross: "Finding the best person or the best organization to invest your money is one of the most important financial decisions you'll ever make." As with stocks, familiarity alone isn't protection. Check out our seven-part special report on financial advisors.
72. Stuff that leads to suckerdom: greed, laziness, unearned trust, ignorance, and shortcuts. When in doubt financially, do the opposite of your favorite athlete.
73. Make sure to get the right odds. There should be a vast difference between what we pay for a has-been or never-was and what we pay for a potential superstar company. As George Soros puts it, "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."
74. Initial valuation matters, but generally, over longer periods of time (decades, not years), stocks have returned more than bonds. The more decades you have left, the more of your portfolio should be in stocks to stave off inflation.
75. In theory, well-timed share buybacks are better than dividends. They save on taxes and allow the people who know the company best to buy up shares when the market acts crazy. In practice, I'll take dividends. (A tangential bonus fact: Dividend stocks have historically beaten non-dividend stocks).
76. Some of the most misinterpreted words in investing: Peter Lynch's "Buy what you know." It's more like "Research what you know and then consider buying."
77. Don't be an Enron baby. Overweighting your investments in the company you work for is a double-down bet we don't need to be taking. On the other hand, your company's 401(k) match is free money.
78. There are many paths to the top of the investing mountain, but some are more fraught with peril -- and there are very few trailblazers.
79. Numbers frequently lie -- especially in isolation. Say you spot a P/E ratio of eight. Sounds darn cheap! But is that industry's profitability rapidly deteriorating? Was there a one-time item that temporarily juiced the bottom line? Is an upstart competitor hungrily eyeing its lunch? Are new regulations threatening its livelihood? Is it a cyclical industry? Is it in a country that has a really poor reputation for accounting fraud or government interference? You get the idea.
80. Mergers and acquisitions are overrated. Somewhere between 50% and 85% of mergers fail to boost value. The frequency of achieving promised "synergies" should be filed somewhere between unicorns and no-hitters.
81. It's hard to be an independent thinker when the pressures to conform are daily and good investment theses can look ugly for years before paying off. Ben Graham said it this way: "Even the intelligent investor is likely to need considerable willpower to keep from following the crowd." Famed investor John Templeton talked of his defense against crowd-following: "When asked about living and working in the Bahamas during his management of the Templeton Group, Templeton replied, 'I've found my results for investment clients were far better here than when I had my office in 30 Rockefeller Plaza. When you're in Manhattan, it's much more difficult to go opposite the crowd.'" The digital equivalent today is turning off real-time news and Internet feeds and reading more thoughtful analysis.
82. The best book I've ever read on the basics of stock picking: Joel Greenblatt's The Little Book That Still Beats the Market. It's literally written so that a small child can understand it. It also does a great job of explaining why return on capital is a measure to pay attention to.
83. It's not the rewards you don't understand that'll burn you, but the risks you don't understand.
84. The guy who invented the P/E ratio (James Slater) on small caps: "Most leading brokers cannot spare the time and money to research smaller stocks. You are therefore more likely to find a bargain in this relatively under-exploited area of the stock market." Of course, because there is less interest and less Wall Street coverage, doing your own due diligence is that much more important. The same holds for other underfollowed areas of the market, like special situations.
85. If you can learn quickly from your own mistakes, you're ahead of the game. If you can learn quickly from others' mistakes, you've won the game.
86. Jim Sinegal of Costco on why you can't pay too much attention to Wall Street: "You have to recognize -- and I don't mean this in an acrimonious sense -- that the people in that business are trying to make money between now and next Thursday. We're trying to build a company that's going to be here 50 and 60 years from now."
87. If it seems too good to be true...
88. Buffett's concept of the "circle of competence" is important: "There are all kinds of businesses that I don't understand, but that doesn't cause me to stay up at night. It just means I go on to the next one, and that's what the individual investor should do." Also consider Steve Jobs' quote: "Focus is about saying no." For a great book on saying no, read Seth Godin's tiny book The Dip.
89. The stock moves I've made based solely on the advice of others -- e.g., "He's a good energy analyst and he loves this oil stock," or "This famous stock picker is buying X!" -- have generally been disasters.
90. If you can read a dissenting opinion without resorting to an ad hominem attack, you're at an advantage.
91. Downer alert: We like control, but we can't control everything. Life and luck can (and will) trump investment plans. You can do everything right and still die penniless. All we can do is give ourselves a better chance to succeed.
92. That said, if you're reading this article, there's a good chance the genetic lottery has smiled favorably upon you.
93. Here's something to think about the next time you get antsy to buy immediately into the latest must-act-now opportunity (e.g., a hot IPO). The year 1986 marked Coca-Cola's 100-year anniversary. If you had bought shares to commemorate the occasion, you'd be sitting on something like 15 to 20 times your initial investment. Time waits for no man -- but stocks will.
94. How can we get rich? Per Ohio State economics professor Jay Zagorsky: "Staying married, not getting divorced, [and] thinking about savings." To those, I would add having the proper insurance coverage.
95. There are more than 5,000 stocks on major U.S. exchanges. A great stock picker finds one great stock idea a year. Don't let the ones that got away frazzle you into buying the ones you should have ignored.
96. The Pink Sheets and over-the-counter markets are where sketchy penny stocks live. Do yourself a favor and stick to stocks on major U.S. exchanges -- preferably ones with market caps of more than $200 million. And never, ever heed penny stock spam emails.
97. When I learned to drive, I nervously focused on each upcoming parked car. My father told me to focus down the road and the parked cars would take care of themselves. Perhaps my first lesson in investing.
98. Do not buy low and sell high; rather, buy low and don't sell often.
99. For the penultimate lesson, let's turn once more to Warren Buffett, who briefly said in his 2004 shareholder letter what took me 98 bullet points to say:
Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous.
There have been three primary causes: first, high costs, usually because investors traded excessively or spent far too much on investment management; second, portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to the market marked by untimely entries (after an advance has been long under way) and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.
100.  Despite my best efforts, I will repeatedly and thoroughly fail to heed these lessons. Let's hope you're better at No. 85 than I am.

Tuesday 1 June 2010

Weathering a Panic

The central concept applicable to the 'buy and hold until fundamental changes' investor is the occasional need to play when it is painful.  But this concept specifically and only means to hold stocks that are being affected just by the overwhelming negative psychological forces that occasionally cause selling routs or panics in the whole market.

To put this very important limiting caveat another way:  when a crash or panic occurs, stocks should be 

  • held only if they are going down because of market factors and 
  • not if they are being affected by company factors.  
This should relate to only a few issues, however, because investors following a disciplined selling methodology (see related article below) already should have weeded out the bad performers and taken profits on the stellar performers well before a bear market reaches climax proportions.

So when appropriate selling has left an investor with only a few, high quality stocks, he can and should hold onto the gems and play through the difficult experience of a panic or crash.  He will be holding only a relatively small portfolio (having followed the other cashing-in suggestions well before the bottom nears), so his level of pain will be no worse than moderate.  And his cash holdings will give emotional comfort and provide the resources for acquiring stocks advantageously when prices get really low.

Some investors may see a contradiction in this advice because they were usually counseled that avoiding losses is the first priority and the best reason for selling.  But taking a short-term dose of paper losses in a crash - by holding quality issues - is a lesser risk than selling out during the fury, and hoping to have the courage and good executions to get back in at lower prices shortly afterward.

If an investor is down to just a few core holdings anyway, he is better advised to tough it out.   The very experience of playing in pain through a temporary crash (think of the October 1987 and October 1989 bashings) is of enormous instructional value despite the modest monetary cost involved.  The process of crisis-thinking and the need to make wrenching decisions that prove valid in short order will serve him well for the rest of his investment career.

Once he has successfully navigated the worst of the choppy investment seas, he will have learned survival lessons and will have internalized feelings and taken in an experience that will be forever his.  That experience deepens his understanding of the way the market works.  Probably most of all, having won at a different game, he develops the wisdom and courage to succeed in similar circumstances in the future.  And that provides the opportunity to make big profits in the handful of similar opportunities that will occur throughout the rest of his investing career.  He will know beyond any shadow of a doubt that the contrarian philosophy of investing works.

When caught in a panic, the central question is whether capitalism in the United States and major Western democracies will continue to function after the panic ends.  If the answer is yes, then there is no reason to sell at foolish levels.  In fact, the only rational thing to do is take courage and make buys.  Being gutsy enough to act on the contrarian test - refusing to sell good stocks cheap because Wall Street and Main Street have lost faith for a few days - insures appropriate selling.  It is difficult to buy in a panic.  Those who can do so are rational enough to sell with discipline as highs approach.

There is one more qualifier on whether to hold or sell after a panic has passed.  Once the panic subsides, there is a lift in the market.  But the effect is significantly different on various kinds of stocks.

  • For some issues, there is a sharp snap-back rally; 
  • for others, there is very little improvement.  
Just as it is not advisable to sell into the panic, it is prudent to reassess positions after the selling frenzy has subsided and the lift in prices has begun.

The object, as always, is to decide what to sell and what to hold.  Selling should not be urgent because pre-bear-phase tactics will have raised a lot of cash, so there's no need to sell to raise cash for margin calls or buying.  But because the goal is always to maximise return on capital and to take advantage of the time value of money, look closely at what to hold and what to sell after the panic has cleared.


Related:

To hold or to sell? Holding should occur only if no tests for selling are failed.

To hold or to sell? Holding should occur only if no tests for selling are failed.

To hold or to sell?

In any discussion of holding versus selling stocks, the circumstances under which it is best to sell should be outlined first.  Holding should occur only if no tests for selling are failed.

The company-related reasons to sell are:

  1. Sell if the news cannot get any better.
  2. Sell if things did not go as planned.
  3. Sell when the broker's advice goes from 'buy' to 'hold.'
  4. Sell if company fundamentals are getting sick.
  5. Sell on the rebound in the aftermath of material, unexpected or discrete bad news.
  6. Sell in certain cases when expected news is delayed.


The market-action reasons to sell are:

  1. Sell when the stock reaches the target.
  2. Sell on an unsustainable upward price spike on big volume.
  3. Sell when a portfolio shows all gains.
  4. Sell if the stock is lazy money and likely to stay that way.
  5. Sell using above-market limit orders, letting the market come to the investor.
  6. Sell with a stop-loss order, but never remove or lower it.


Investor-related reasons to sell are:

  1. Sell if the stock would not be bought again today.
  2. Sell after gloating or counting the chips.
  3. Sell rather than hope against hope for a 'maybe' bailout.
  4. Sell and step aside on a personal losing streak.


If an investor sells stocks in a disciplined manner using the signal above, he is likely to end up with a good deal of cash before the market moves into a bear cycle.  Relatively few of his holdings will fail to hit one of  the 16 triggers noted in those lists above.  Those stocks that do survive will tend to be high-quality growth issues that have continued to perform fundamentally and have not run up to unreasonable price levels.  Some experts refer to these as core holdings or 'businessman's risk' foundation stocks.  They are stocks that have given consistent indications they can be held through good and bad in the market.

All other stocks will have become sales before a panic bottom because:

  1. They worked as planned.
  2. They acted too well for a brief period of time.
  3. They got unreasonably priced.
  4. They were wasting the time value of money by going nowhere.
  5. They developed significant fundamental problems. 


Very few stocks can escape all those screens for a long period.  So if an investor is cashing in as prescribed and if his buying discipline rejects new positions when valuations get too pricey, he ends up still holding very few stocks as the market get toppy.  That, of course, protects his capital.

There are two major price-driving forces:

  • fundamentals (which control the long term) and 
  • psychology (which rules the short and medium term).


The fundamental and psychological factors affect stocks in both directions.  And as an overlay, understand that they can affect a stock either

  • directly (because of the company behind the stock itself) or
  • indirectly (because the market trend is so strong that virtually no stocks can buck it).  
However, the indirect effect is much stronger on the downside than on the upside:  fear is a more powerful driver than greed.

Wednesday 14 April 2010

Handling Mistakes and Bad Luck

Everyone makes mistakes, and bad luck strikes everywhere.

There is not much you can do about bad luck except to diversify and shy away from huge risks.

When you do make mistakes, take the time to ponder them and find ways to avoid making the same ones again.

Friday 3 April 2009

Sell the losers, let the winners run

Why selling is a common problem
Published: 2009/02/04


Most investors tend to agree that the decision to sell a stock is one of the most difficult to make. Sometimes it is more difficult to decide when and what to sell than to buy. Ever wondered why?

* People tend to sell winners too soon and hold on to losers too long

You will find that regardless of whether the market is running hot or is coming down, there are still a lot of people out there who either sell their stocks too early only to realize that the prices continue to soar, or hold on to losers for too long only to see them continue to bleed further.

From a behavioural finance standpoint, this phenomenon is held by Hersh Shefrin and Meir Statman (1985) as the "disposition effect". This was discovered from their research entitled, "The disposition to sell winners too early and ride losers too long: theory and evidence".

Based on research, individual investors are more likely to sell stocks that have gone up in value, rather than those that have gone down. By not selling, they are hoping that the price of the losers will eventually go back to their purchase price or even higher, saving them from experiencing a painful loss.

In the end, most investors will end up selling good quality stocks the minute the prices move up and hold on to those poor fundamental stocks for the long term, while the performances of these stocks continue to deteriorate.

* People tend to forget their original objectives

In stock market investment, there are two types of investment activities, trading versus investing. Trading means "buy and sell" while investing means "buy and hold". The stock selection criteria for these two types of activities are entirely different.

Most of the time those involved in trading will choose stocks based on factors which will affect the price movement in short term, paying less attention to the companies' fundamentals whereas those involved in investment will go for good quality stocks which are more suitable for long-term holding.

However, you will find that many people get their objectives mixed up in the process. They get distracted by external factors so much so that some panic when the market goes in the direction that is not in line with their expectation, and as a result, end up selling the stocks that they find too expensive to buy back later.

On the other hand, some force themselves to change the status of the stocks that were originally meant for short-term trading into long-term investment as they are unable to face the harsh fact that they have to sell the stocks at a loss, even though they know that the stocks are not good fundamental stocks that can appreciate in value.

So, when to sell then?

There are few different schools of thoughts on this. Based on the advice from the investments gurus, like Benjamin Graham, Warren Buffet and Philip Fisher, when you buy a stock, you need to make sure that you understand the companies that you are buying, and these are good fundamental stocks, which will provide good income and appreciate in value in long term.

Therefore, you will be treating your stock purchase as a business you bought, which is meant for long term. You should not be affected by any temporary price movement due to overall market volatility.

You will only consider selling the company if the growth of the company's intrinsic value falls below "satisfactory" level or you find out that a mistake was made in the original analysis as you grow more familiar to the business or industry.

However, if you find that your investment portfolio is highly concentrated on one single company, then you might want to consider diversifying your portfolio and lowering your risk.

Any single investment that is more than 10 per cent to 15 per cent of your portfolio value should be reconsidered no matter how solid the company performance or prospect is, suggested Pat Dorsey of Morningstar.

Last but not least, if you find that by selling the stock, you can invest the money in a better option, then that is a good reason to sell.

In summary, successful investing is highly dependent on your self-discipline, taking away the emotional factors and not going with the crowd. It should always be backed by sound investment principles.

Always remember there is no short cut in investment, only hard work and patience.

Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.

http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC2/Article/index_html

Thursday 19 February 2009

Read This Before You Sell All Your Stocks

Read This Before You Sell All Your Stocks
By Tim Hanson February 18, 2009 Comments (6)

We knew it was coming, but it's the news we've all been dreading. Yet there it was recently, front and center in The Wall Street Journal:
"Rank-and-file investors are losing faith in stocks."

The story is predictable

Yesterday, after all, we experienced yet another near-4% drop, plunging stocks close to their bear-market lows of November. Small investors, shell-shocked by losses this year, are selling what's left of their stocks and stashing cash in bonds and FDIC-insured CDs. According to recent data from the Investment Company Institute (and reported by the Journal), "Investors pulled a record $72 billion from stock funds overall in October alone ... [and] fund companies say withdrawals have remained heavy."

Indeed, Journal writer E.S. Browning profiles three such investors.

  • The first, a 52-year-old, was "a big believer in stocks in the late 1990s" but is now putting all of his cash in CDs.
  • The second was an aggressive investor in the 1990s, but moved to "a more conservative mix after the 2001 terrorist attacks" and has since become more conservative.
  • And the third, a 25-year-old, loved stocks when he was earning 10% to 20% per year earlier this decade, but has now "shifted his retirement savings to corporate bonds, a money market fund, and a few utility funds."

That'll work out well

Look, let's get this out of the way right now. There's a place for bonds, CDs, and smart asset allocation in every portfolio. But what these three investors have in common is that they were buying stocks when they were high and going higher and are now selling stocks when they're low and (potentially) going lower.

In other words, they bought high and sold low ... exactly the opposite of what you want to do as an investor!

Now, I can understand the 52-year-old's motives better than the 25-year-old's. The former is nearing retirement and wants the security of a stable cash nest egg. But the latter is at least 30 years (probably more) from retirement and is likely dooming himself to decades of subpar returns.

Provided the reporting is accurate, of course

Given plummeting interest rates, the best money market rate I can find today is 3% per year. At that rate, $10,000 will turn into about $24,000 over 30 years.

As for stocks, they don't generally decline 40% per year (as they did in 2008) all that often (though such declines are difficult to predict). In fact, over the trailing-30-year period stocks have returned about 7.6% per year -- which would turn that same $10,000 into about $90,000 ... a pretty darn big difference.

All of this is to say, if you have plenty of time until retirement (let's call it 10 years or more), now is the time to be a buyer of stocks. Given depressed valuations, you may even do better than 7.6% per year. And even if you're nearing or in retirement, chances are you have some money that you don't intend to spend for another 20 or 30 years. Those long-term savings are also a candidate for the stock market, though again, you'll want to have a sound asset-allocation game plan in place before you invest.

Think about it

If you believe Google (Nasdaq: GOOG) and Amazon.com (Nasdaq: AMZN) will be dominantly profitable media titans 25 years from now, would it be better to buy the stocks today at $350 and $60, respectively, or to have done so 12 months ago when they were 15% to 30% higher?

That's not to say they can't go lower from here, but when you buy stocks, you should do so with the same time horizon as your money.

Similarly, if you believe China is the next global economic superpower, then you can't beat today's prices for China Mobile (NYSE: CHL) and PetroChina (NYSE: PTR), the country's telecom and energy giants, respectively.

Finally, even if you don't believe in any individual stocks, you can still park your long-term money in a low-cost total market index fund (Vanguard's Total Stock Market Index (VTSMX) is a good choice), which will give you exposure to fantastic, dividend-paying firms such as Coca-Cola (NYSE: KO), Procter & Gamble (NYSE: PG), and Microsoft (Nasdaq: MSFT).

Yet these are the stocks investors are selling today. It just doesn't seem to be the smartest long-term move.


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Tim Hanson does not own shares of any company mentioned. The Motley Fool owns shares of Procter & Gamble. Amazon.com is a Motley Fool Stock Advisor recommendation. Microsoft and Coca-Cola are Inside Value selections. Google is a Rule Breakers pick. Please congratulate the Fool's disclosure policy on declaring itself the world's best.

http://www.fool.com/investing/international/2009/02/18/read-this-before-you-sell-all-your-stocks.aspx

Monday 4 August 2008

Selling and Holding mistakes Checklist (Part 5 of 5)


A. Common Selling Mistakes

􀂆 Price is down, but fundamentals remain solid
􀁻 Prices fluctuate for reasons that are not always rational.
􀁻 The price will follow fundamentals in the long run.
􀁻 Consider buying more shares.

􀂆 The company has short-term problems
􀁻 Do not make a rapid decision.
􀁻 Look at the long-term impact of the news.

􀂆 Selling winners to lock in gains
􀁻 If you sell all your winners, you will be left with losers.
􀁻 If your winners are high quality companies, they are likely to
become even bigger winners.

􀂆 Selling because the price reaches a predetermined limit
􀁻 An executed stop-loss order will bring you less money than if
you sell at the current price.
􀁻 A limit order at a higher price, without regard to fundamentals,
may generate additional taxes and eliminate your chance of
future gains.



B. Common Holding Mistakes

􀂆 When fundamentals deteriorate
􀁻 If your evaluation indicates this is a long-term problem, holding it
is likely a mistake.
􀁻 If you wouldn't buy this company today, don't hold it.

􀂆 Trying to get even when you have a paper loss
􀁻 You can't change the past; what matters is the future.
􀁻 Would another stock be a better investment? Prepare an SCG.
􀁻 Remember the NAIC Rule of 5.
􀁻 You may be able to offset some capital gains with this loss.

􀂆 Holding inherited stocks out of loyalty
􀁻 These stocks may be inappropriate for your financial situation.
􀁻 The person who left you the stocks would want you to do what is
best for your circumstances.

􀂆 Not following your stocks after purchase
􀁻 "Buy and hold" does not mean "buy and forget." Companies change.
􀁻 Keep up with the news on the company.
􀁻 Maintain your SSG and PERT.