Showing posts with label buy and sell. Show all posts
Showing posts with label buy and sell. Show all posts

Thursday 9 August 2012

Buy and Hold: Still Alive and Well


By Morgan Housel
August 7, 2012
Meet Bill. He invested $10,000 in an S&P 500 (INDEX: ^GSPC  ) index fund 10 years ago and checked his account balance for the first time yesterday morning. He's elated to see his investment is now worth $19,590 after all dividends were reinvested.
Bill knows a thing or two about market history. He knows that, historically, he earned a good return -- 7% a year, or close to average. He remembers that during that decade we endured two wars, a housing bubble, a collapse of the financial system, the worst recession since the Great Depression, 10% unemployment, a near shutdown of the government, a downgrade of U.S. debt, and Justin Bieber. Through it all, he managed to nearly double his money without lifting a finger.
"Buy and hold works wonders," he thinks to himself.
But then he starts reading market news. Almost without exception, he finds that commentators have declared buy and hold dead, using the last decade as proof.
Buy and Hold Is Dead (Again) is the title of one popular book. "Holding an index or mutual fund for decades will not work for today's investor as spikes in volatility and risk can quickly wipe out any gains," one article warns.
"The only way to make money in the equity market is to be nimble, and that means adopting a strategy that is not buy and hold," he reads. "Buy & hold is a relic of a bygone era when the economy was stable and consistent growth was the norm," another analyst laments.
"What are these people talking about?" Bill wonders. He spent the decade visiting his kids, taking trips to the beach, reading good books, and enjoying life -- and managed to double his money all the while. These professionals, it seems, spent the decade poring over financial news, trading obsessively, stressing themselves relentlessly, and they're bitter about the market.
Bill knows why they're bitter. They didn't double their money. They likely lost money. Most traders do -- a fact he's well aware of. The only people who think buy and hold is dead, he realizes, are those frustrated with their inability to follow it.  
Bill is fictitious, but the numbers and analyst quotes here are real.
Going back to the late 19th century, the average subsequent 10-year market return from any given month is about 9% a year (including dividends). If you rank the periods, the time from August 2002 to August 2012 sits near the middle of the pack. What we've experienced over the last decade has been pretty normal, in other words. This goes against the thousands of colorful buy-and-hold eulogies written in the last few years, but it has the added benefit of being accurate.
And even it understates reality. The S&P 500 is weighted toward the market cap of its components, a quirk that skewed it toward some of the most overvalued companies in the last decade. An equal-weight index -- one that holds every company in equal amounts and provides a better view of how companies actually performed -- returned more than 140% during the decade.
Why have so many declared buy and hold dead? I think it's all about two points.
First, if Bill started investing just two years earlier, his returns through today would be dismal. 2000 was the peak of the dot-com bubble; 2002 was the depth of its aftershock recession. Bill started investing when stocks were cheap, setting him up for good returns today. The majority of today's investors, who likely began investing during the insane late '90s, have fared far worse.
But that doesn't prove buy and hold is dead. It just proves that the deluded interpretation of it -- that you can buy stocks any time at any price and still do well -- is wrong. But it was always wrong. It just became easy to forget during the '90s bubble. For as long as people have been investing it's been true that if you pay too much for an asset, you won't do well in the long run. If you buy the S&P 500 at 30 or 40 times earnings, as people did in the late '90s, you're going to fail. If you do like Bill and wait until it's closer to its historic average of 15-20 times earnings (or even better, lower), you'll do all right. Nothing about the last decade has changed that. The '90s, not the 2000s, were the fluke.
Second, most people know that buy and hold means holding for a long time, like 10 or even 20 years ("Our favorite holding period is forever," says Warren Buffett.) But, in an odd mental twist, they use volatility measured in months or even weeks to reason that it doesn't work.
The market suffered all kinds of schizophrenic turns over the last decade. Since 2002, there have been 401 days of the Dow Jones (INDEX: ^DJI  ) rising or falling more than 1.5%, and 83 days of it going up or down more than 3%. These can be emotionally devastating for investors following daily market news, watching their wealth surge and crash before their eyes.
But Bill didn't even know about them. He was too busy enjoying his sanity at the beach. He knew he was investing for the long haul, and that he bought at a decent price. Why should he care what stocks do on a daily, monthly, or even yearly basis? While others tumbled through manias and panics, Bill's blissful ignorance was one of his greatest advantages -- as it is for most buy-and-hold investors.
Naysayers of buy-and-hold investing lose track of this to an almost comical degree. The "flash crash" of 2010 sent stocks plunging for 18 minutes before rebounding. Last week'ssnafu by market-maker Knight Capital caused a handful of companies to log some funny quotes for half an hour. These events should be utterly meaningless to long-term investors. Yet the number citing them as proof that buy and hold no longer works is astounding.
Jason Zweig of The Wall Street Journal quoted an investor last week dismayed with the Knight Capital fiasco. "You could buy and hold a company for 15 years and then have everything you've built up disappear in five minutes," he said. The same fear was echoed two years earlier during the Flash Crash.
Folks, accept some frank advice: If you measure your portfolio in five-minute intervals, you shouldn't be investing. If you think business value is "lost" by a few misquoted trades, you shouldn't be investing. Value is created when a business earns profit, allocates it wisely to its owners, and compounds year after year. An errant stock trade doesn't make a company less valuable any more than misplacing your birth certificate for 18 minutes makes you less alive.
"There's no such thing as a widows-and-orphans stock anymore," Zweig's investor complains.
Sure there is. Ask Bill.

Monday 16 April 2012

Value investing – When to Sell or Hold?

A good discussion on when to sell in another blog.

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12:30 pm
April 10, 2012

matthew

Member
posts 13
9
Yes, I did this on Aeropostale. Approximately a 32% gain I got on that bad boy.
Reasons I sold, it had trouble getting past $21-$22, and then Barclay's raised there price target to $25 so more investors bought and price went up a bit. I took this chance and sold it, and it has now went back down after today -5%. Keep in mind that I sold it early basically because my intrinsic value was around $23 and I figured i'd rather sell now than risk more just for a small additional gain.

If I had not sold it then I would have been stopped out as during the price consilidation period I put in a stop loss @ $21
10:55 am
April 10, 2012

Jae Jun

Admin
posts 1408
8
do any of you sell after a big fast run up even though it is below intrinsic value?
6:29 am
April 1, 2012

nell

Member
posts 88
7
Some reasons to sell..


1. intrinsic value < price -> no margin of safety
2. business quality goes south, management issues etc.
3. better opportunity


One good reason to buy more is when market tanks but intrinsic value of your specific company keeps growing..

Best wishes,
Nell
10:58 am
March 31, 2012

BugMan

New Member
posts 2
6
I'm fairly new to this, and I, too, see selling as the hardest part.

One thing i've thought of that makes it easier is compare your current holdings to what else is out there. If are holding onto a good company, and you figure it has the potential to go up 12% per year, but you see other companies out there that have the potential to go up 25% per year, then sell your current stock and buy the other ones. It's not that the old company isn't good — it is — it's just that there are better deals out there.
8:03 am
February 27, 2012

gstyle

Member
posts 4
5
I am fairly new to value investing so I find it good to know other have had similar thoughts to my own!
2:17 am
February 25, 2012

Jae Jun

Admin
posts 1408
4
selling is defnitely harder than buying.
One of my weak points as well. If I had a partner, I'd find someone who was better at selling than buying. It would be a great combination.

But to sell, you would have to re value a company regularly.
If there isn't much upside to intrinsic value, then I'm willing to sell at 10% below intrinsic value rather than hanging on.
Companies like GRVY, I am happy to hold even if I'm up 100%.
8:17 pm
February 22, 2012

jalleninvest
Coronado, CA

Member
posts 22
3
Post edited 8:20 pm – February 22, 2012 by jalleninvest
G.raham came up with the 50% or two years towards the end of his life, in that interview that is bandied around the internet some. I am not at all sure that he practiced that in the Graham Newman closed end fund he ran. In one case, he did not, and that was GEICO which they bought half of in 1947 or 1948. They ended up having to distribute the shares to the shareholders of the fund, and it increased 54,000 per cent or something like that. Many became multimillionaires, quite a feat back then.
Walter Schloss, who died the past weekend at age 95, talked about selling. According to him that was the hardest part of this business, trying to figure out when to sell. He didn't like paying short term income tax rates and tried to hold stocks for a number of years. He commented ruefully several times about buying at $30, selling at $50 and watching the stock go to $200, etc. He recommended a new company to Graham that had wonderful prospects. Graham turned it down, saying it wasn't their kind of deal. It was Xerox, of course, but Schloss said Graham would have sold it at a double anyway and missed out on the big increase.

If it was easy, everybody would do it!
9:23 am
February 21, 2012

Graeme
Austin, Texas

Member
posts 162
2
Yeah, this is always a fun question.

For me what I do is I break up my holdings into different categories. For example, I have holdings that I bought at a good (not great) but good price, but they pay me dividends, and if they keep acting as they have for years, they should be increasing my dividends every year. I get a bit of return on the stock price increase, but a great return over many years with the dividends reinvesting. So my sell thesis on these guys is pretty firm: as in, I wont easily do it.

But then I have holdings that I would consider a deep value: selling at a deep discount to book value, or below NCAV or in a really beat up industry. These are the shares that I have a target price for: as in, I will sell when they hit that specific price. There is not a whole lot that would change my mind and make me hold on to it longer. And sometimes that target price is 50% above my purchase, 100% or even more.

So you need to judge for yourself whether the business you bought shares in is now fairly priced at it's 50% gain or if it still has room to go.
4:33 am
February 21, 2012

gstyle

Member
posts 4
1
Hi,

I was pondering the concepts of selling a value stock or holding it for longer. I understand that Ben Graham had a strict rule of selling after a 50% increase or after two years, whichever came first.

A stock brought at value brings the 50% gain, but if this stock is in a strong company with good prospects for the future, should it still be sold? At this point, do you make a decision to strictly adhere to Ben Grahams teachings or evolve to be more like Buffett in buying a good company at discount and holding it for a long time?

If the company in question was a 'cigar butt' then selling after its gain seems more obvious than for a value stock in a good company.

Thoughts / comments
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http://www.oldschoolvalue.com/blog/forum/value-investing/value-investing-sell-or-hold/#p4033

Wednesday 9 February 2011

Make Gradual Sells

The market is just as unpredictable when it comes to choosing the right time to sell as it is when choosing the right time to buy.

As with buying stock, you will need to have a strategy to sell.  Why making gradual sells maybe preferred?

If you move everything out because you're afraid of losing it all, how will you feel if the stock recovers to your buy price and then pushes beyond?  If the stock doubles after you buy it and you sell everything, how will you feel when it becomes one of the legendary ten-baggers?  In both cases, you'll feel terrible.  I know because I have been there.  

Gradual moves into and out of positions take some of the pressure off because everything doesn't need to happen just right for you to make money.  Things can be a little fuzzy on the buy and sell.  As long as you are making gradual moves, you'll be fine.

Combining gradual moves is a good way to reduce investment stress.

Let's assume you own 2,000 shares of Company ABC.
  • A couple of reasons to sell have been met based on your research, but the company has just opened a new distribution center that you didn't know about when you first bought. You're not sure if that's enough reason to hold on.  The stock is trading for $30 - three times what you paid for it.  You feel comfortable taking that kind of profit now, but something about that new distribution center has you thinking the stock will go higher still.
  • If you sell nothing, you're going to blow a vessel if ABC drops to $12 a share.  If you sell everything, you're going to blow a vessel if it rises to $40 a share, or even $32.  So you compromise on both the sell price and the amount you're going to sell.  You placed a good till cancelled limit order to sell 1,000 shares at $32.  Then you go hiking, or golfing, or swimming, or take a run.  
  • Three weeks  later while you are not paying any attention, ABC hits $32 and your broker sells 1,000 shares.  Now, no matter where the stock goes you can take comfort in your interim profits.  If the price begins to drop, you will consider selling the remaining shares, or buying additional shares with the money you just made at $32.  If the price rises, you'll make even more profit on your remaining shares.

Saturday 27 November 2010

The Anxiety and Joy of Selling

It is not possible to sell at the absolute top or to buy at the absolute bottom of the price fluctuations of your stock.  Therefore, do not focus on timing your selling or buying at the absolute extremes of price fluctuations.  Be content that you have sold close to the peak and that you have bought close to the bottom of the price fluctuations.

One of my stock has moved upwards, very much higher than the fair value that I give to it.  It's PE has now exceeded 1.5X its signature PE, granted that its signature PE was a single digit one.  There was no deterioration in its fundamentals.  Its recent quarterly report did not report or suggest any dramatic improvement in its fundamentals.  The price of this stock has climbed with intermittent periods of small corrections over a very short time of less than a month.  This counter has given dividend yearly and at this present high price, the yield is rather low.   I sold off half of my stocks in this counter locking in a very good substantial profit. The other half will be sold gradually should the price continues to move upwards, deteriorating its 'upside potential to its downside risk ratio'.

As the remaining shares are now held virtually cost free, this investment operation is positive NOW and will always be positive in the FUTURE.


Related:

The Anxiety of Selling

Wednesday 27 October 2010

For traders: Always keep in mind that the company and its stocks are distinct

A company may reach new heights of prosperity while you as individual stockholder own a bit of it, but you still can lose money.  Why?  You and other temporary owners have bought merely rights to cash in on whatever changing level of perception other people (taken as a whole, the market) may hold about that company.

1.  They may like it less tomorrow
  • because of buying in too late (too high), 
  • because interest rates are rising (making all equities less attractive relative to bonds or Treasury bills); 
  • because of adverse public opinion about its products or industry;
  • because of press publicity over high executive salaries; 
  • because general corporate reputation might deteriorate; 
  • because investment tastes shift in favour of other industries; or 
  • because of a rising fear of recession.
2.  Or the overall stock market may be declining from a too-high prior level.

3.  Other investors collectively may be right or wrong about the company over the short to medium term.  And you as an individual may prove correct, while the majority are incorrect, about fundamentals.


To determine whether now is the time to hold or to sell, focus on changes in perception rather than on long term fundamentals.  An investor can be dead-on right about fundamentals, but if the market collectively decides that it no longer is willing to pay as much for this company's reputation or earnings, its share price heads south.  Eventually, an individual's logic may be vindicated again as value reasserts itself and other investors resume their willingness to pay for it.  But in that interim, the individual is going to suffer a loss for fighting the tape.

As Benjamin Graham noted in The Intelligent Investor, markets act as voting machines in the short term but in the long run function as weighing machines.  Thus, actions and opinions of the crowd determine share price in the short to medium term, which is the most important factor because that share price determines whether you have a gain or a loss, and when.  So buy and sell not just on personal judgment of a company behind a stock but on your studied assessment of what other investors think of the company and how that thinking seems to change.  A great company can be a bad stock (for trading or investing) if bought at just any price without regard to reasonable value.

Prices on the tape reflect people's reactions and perceptions and beliefs translated into buying and selling decisions; they do not reflect the truth about a company's fundamentals.  So keep in mind that the company and its stock are distinct.  

Being able to keep a company and its stock strictly separate in your mind has become ever more critical in recent years.  Excellent companies may suffer single-quarter earnings shortfalls against analyst estimates or might even experience actual interim declines in earnings.  Such minor stumbles usually call down immediate and massive institutional selling.  While such selling may be vastly disproportionate to any long-term true fundamental meaning of the triggering event, it does signal a coming period of more cautious appraisal by major investors.

If you maintain the mental agility to view a stock as merely an opinion barometer because you have separated it from the company's fundamentals, you will be able to sell without costly hesitation.  Fail to differentiate a company and its stock in your mind and you will have great difficulty over separation and loyalty issues and will be less successful in your investment moves.  Unless you plan on holding forever, which will produce merely average or even sub-par returns, you need to buy and sell.

Swings in market psychology drive prices to fluctuate around true long-term value (if only the latter could ever be known accurately today!).  Another way of viewing these price swings is to think of them as changes in the consensus of esteem given to a company by all investors taken together.  When esteem runs up above reasonable valuation of fundamentals, price will eventually correct downward to redress that temporary mistake.  Above-average profits accrue to those who capture such positive differentials of esteem minus reality.  (Similarly, on the buying side of the equation, handsome profit opportunities can be captured when reality minus esteem is a positive number, meaning that the stock in more common terms is temporarily undervalued by the market of opinion.)