Showing posts with label when to sell. Show all posts
Showing posts with label when to sell. Show all posts

Saturday 28 November 2020

When to sell? You will always not be happy with yourself. The philosophical approach.

Philosophically!!! This is the question that you have to come to self realization. 


You will always not be happy when you sell!

You will always be wrong when you sell: this is your thinking. 

  • You sell with a profit but price go higher so you think you are wrong. 
  • You sell at a loss but the price bounce back so you think you are wrong. 
  • You sell at a profit when price drop you still think you are wrong because you should sell at the very top.
The whole idea is you are not happy with yourself no matter what. 


Set your goal for a time period

So it would make more sense to set a goal for a time period and when you reach the goal celebrate and set the next goal.

Don’t bother if you are right or wrong, as long as the 2 steps back are less than 1 big step forward to reach your goal. This is just a game.

Hardest part of investing for me is knowing when to sell

 

Some reflections:


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Sell when you no longer believe in a company

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When the fundamentals change, sell it.

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Honestly, when I would have sold the stocks in my portfolio which were 40% down instead of up, I would have made far better returns.

Ask yourself a question: "would I buy at this price?"

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When your position doubles, sell half and let the house's money ride.

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Depends on your investment horizon. 

Great business will continue to grow as will their price in the long term. Short-term volatility will always be there. If you’re invested in great businesses don’t worry about short term price fluctuations.

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If you’re looking for short term gains then you can consider using options to supercharge your returns. But first learn how to trade options.

For the short term, the power of technical analysis will give you indicators of when to sell.

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Depends what you are in it for. 

I have long term holdings and trading cash. 

Long term is just that, as long as the story doesn’t change I hold. 

Trading cash is completely different and gets a bit wild. Can be in and out in a day if the return is good enough.

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For Deep value stocks, or stocks that you buy simply due to cheap valuation, some investors simply buy and exit when the stock is close to 90% of his calculated intrinsic value. 

But if the business deteriorate to the point whereby the intrinsic value keeps eroding, you might want to sell it once you find a better opportunity.

For growth investing or superior business, if you managed to find a good price to enter, try to never sell it unless the fundamentals / thesis changes.

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I very rarely sell. I try to find companies I believe in long term. I only sell if something changes so I no longer believe that companies can give me good returns. Like if a see a shift in technology or how people use products.

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If you are not willing to buy again then it's time to sell

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I use allocation of portfolio. for example, I allocate 20% portfolio to AMD. when it rises, I will be gradually trimming it over time and transferring the funds to other stocks I find of value. When it start to crash, I will buy gradually as it goes down. This will inevitably mean I wont sell at highest or lowest. But valuation will also help me decide the %allocation so when AMD is overvalued based on the metrics, I chose to drop it to 15% of portfolio so I sell 25% of my holding. I use this as a guideline to discipline my buying and selling.

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I control my greed by setting the selling price BEFORE I buy the stock.

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Actually if it is an uptrend stock, don’t sell, ride the trend ... set a trailing stop like if it falls back more than 10% from new high, get out, else just ride the trend .... this is not greed ðŸ™‚

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As long as the fundamental doesn’t change and the management continue to commit and grow the company... never sell

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Always have a sell mark before buying the stock unless you are planning to hold long term. And that is if it is positive or negative. You may lose some profit but I'd rather take a little profit than lose it all.

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I like a trailing stop loss. The stock can still go up, but if it starts to fall I don't lose my gains.

How often is the stock stop loss triggered? Has the stock price ever gapped below your stop loss?

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Be greedy. Don't sell your winners just because they're up. Only sell when your original thesis no longer holds. Don't practice portfolio socialism lol

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Do whatever consistently works for you. Doesn’t matter what I say or anyone else.

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You shouldn’t sell. Unless the number is ridiculous, I’ve learned to avoid selling. If I never sold any of my positions I would easily have over 100 more money today.

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I sell when is overvalued 15-20%~.

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I set up trailing stop sell orders when a stock reaches 7 percent gain.

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Have a plan when you buy it, then stick to the plan, whatever it may be, sure you can re-evaluate but by and large stick to the plan.

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It's a loaded question. It depends on your plan/goals. Part of your plan is whether your stocks are in taxable vs qualified accounts. I tend to rebalance once or twice per year in my qualified accounts. I'm a net buyer of stocks in each year in the taxable account that I intend to hold very long term for compound growth and at that time sell very little for income.

In my IRA, my goal is to build equity/net worth and consider converting some stocks for income/dividend. The end of each year, if the fundamentals change for a company, I highly consider selling.

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That’s another great question.

Buffett actually covered a piece of this in his most recent annual meeting...

Quoting back something that Sir John Maynard Keynes (an old, and very famous economist) was famous for saying:

"When the facts change, I change my mind. What do you do?"

In other words, one of the biggest reasons, and probably the most difficult is to actually change our minds when our original thesis for the investment has fundamentally changed.

Trust me when I say that this is not easy.

I like to say you should hold onto our opinion the way we have to hold onto a bar of wet soap. If you hold on just a little bit too tightly, it's likely to get away from you when you need it...

The second biggest reason is when our investment thesis actually comes true.

I think it was Guy Spier who talked about how much more difficult it is to sell something we own, than it is to buy into it.

We get attached to it. Especially if it's making us money!

I literally ran into this recently.

I bought a company that I determined to have an intrinsic value of roughly $23. I bought in at $10. in less than a year it quickly went up from $17 to $23 and guess what I did...

Nothing!

The story in my thesis hadn’t changed and it would have still been a great investment (prior to COVID) but even though I knew it was at fair value, I didn’t act.

I’m still trying to analyze that and figure out if I made the right or wrong choice.

Obviously if I knew a pandemic was going to hit it would have been the right choice to sell, but it’s not true when people say hindsight is 20-20.

There are always factors at play that we can’t see.

Honestly right now I think it was greed that made me hold on.

The speed at which it was rising was too exciting and I probably allowed my “what if” emotions to kick in.

Everyone who's not a robot struggles with this (bleep bleep blorp for you robots out there...)

The simple answer is to know what something is worth and only ever sell when it’s roughly 20% above that fair value.

Normally my rule is to sell at 120% fair value, so it wasn’t quite there, but I could have just sold and been happy with the return I would have got.

I think it goes back to that 80/20 principle. Except we can flip that in it’s head.

If we are waiting for 80% of the time to receive our last 20% is that time we’ll spent?

John Templeton, one of my favorite investors, would have had a sell order already set after he bought the stock.

He was amazing at doing anything he could to eliminate his emotions while he was still rationally analyzing the business.

I think I should start this as well.

One of the beautiful aspects of investing is that’s its continuous learning.

I think we can all learn a lesson from this. And as you can see.

As you can clearly see... I’m still learning.

Hope that helps!

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Sell as much % as you are up, quarterly. Buy as much % as you are down.

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Never. I usually buy with the intent of keeping the cash flow Forever. I sell if the company seems to be collapsing, or I have made such a huge growth that I want to invest in something else. This is just my way of investing, and my tip - it’s in no way the only or «correct» way to invest. ðŸ˜Š

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Put a trail limit and let it run.

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Check the volume versus the 10 day average volume to be able to see a good exit strategy....not really a value investing type of thing....but has helped me understand why stocks go up and down throughout the day!

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Make a habit of rebalancing chances are if a particular stock is overvalued it will be a larger portion of your portfolio so you can sell some of it and use that money to buy another stock you deem undervalued.

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Don’t sell for years. Quit trying to time the market. Buffet holds for decades.

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As soon as you think about "should i sell?"...sell some. Better to be a fool and lose out on more gains than a fool who rode his gains back down to break even or worse...a loss.

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For people with a "PURE" value investing strategy, a P/E of 40 or a minimum of 50% profit is a good time to sell in the short-term (Walter Schloss strategy). Personally, I prefer to seek great companies and never sell if the fundamentals don't change. ✌️


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I sell when I find something better

 

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If it's a great business purchased below intrinsic value and now overvalued, I'd keep it anyway. You may not a get another chance to purchase it below intrinsic value. If you're feeling like you're becoming too concentrated in one position, go ahead and trim it, but great businesses are seldom undervalued.

 

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Philosophically!!! This is the question that you have to come to self realization. you will always wrong when you sell is your thinking. You sell with a profit but price go higher so you think you are wrong. You sell at a loss but the price bounce back so you think you are wrong. You sell at a profit then price drop you still think you are wrong because you should sell at the very top. the whole idea is you are not happy with yourself no matter what. So it would make more sense to set a goal for a time period and when you reach the goal celebrate and set the next goal. Don’t bother if you are right or wrong. 2 steps back < than 1 big step forward to reach your goal. This is just a game.

 

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Wednesday 27 May 2020

"The time to sell a stock is - almost never." The four rules of selling.

Philip Fisher, in his book Common Stocks and Uncommon Profits wrote, “If the job has been correctly done when a common stock is purchased, the time to sell it is—almost never.”

I sincerely believe in this idea of never selling my stocks, IF I did the job of picking them well. But then, there are times when you must sell your stocks, and one of the keys to investment nirvana is the ability to know when to do that. 



Four rules of Selling

A value investors in India, Sanjoy Bhattacharyya, wrote on the art of selling stocks some years back, wherein he shared the four rules of selling
While remaining disciplined in terms of the process of stock-picking, the seasoned value investor waits patiently for Mr. Market to provide opportunity.
          
     Typically, there are just four reasons to sell:
1. A clear deterioration in either earning power or ‘asset’ value.
2. Market price exceeds ‘fair’ value by a meaningful margin.
3. The primary assumptions, or expected catalysts, identified prior to making the investment are unlikely to materialise or are proven to be flawed.
4. An opportunity likely to yield superior returns (with a high degree of certainty) as compared to the least attractive current holdings is on offer.


 https://www.safalniveshak.com/riskiest-moment-in-investing/

Sunday 17 May 2020

Portfolios and Selling

#Good company gets inexpensive, how much to buy?

When an understood, good company gets inexpensive, we buy its stock. But how much?

(1)  Enough uninvested cash (CASH)
My rule is simple. Provided that I have enough uninvested cash, I put 10 percent of the portfolio in it. I’ve seen other good investors use infinitely more complicated guidelines, but none that I’ve found to be more practical.

If I’m not comfortable putting at least a tenth of the portfolio into an equity, I don’t want the equity. If my conviction is lower I don’t buy less, I buy none.

(2)  Strong conviction (COURAGE)
A strong conviction is important in part because right after a buy the price of a stock is almost certain to drop. That’s the corollary to another near-certainty: that the price paid for a stock is unlikely to be a low. Rock-bottoms don’t send out invitations. So knowing when one will happen is impossible. The astute investor counts on missing them.

Correspondingly, I prefer not to put more than a tenth of the portfolio into a single equity. This reduces the chance that I’ll lack the cash necessary to take advantage of other opportunities that emerge.



#Buying is one aspect of portfolio construction. Another is selling.

There are two problems with selling. 

1.  The first is taxes. 

The profitable sale of stock is taxable in most circumstances. Just how much this eats into long-term returns is best illustrated by example.

Picture two portfolios. Each starts with only cash, buys only non-dividend paying stocks, and liquidates after 30 years. Assume that any stock sales are subject to a total long-term capital gains tax rate of 30 percent.

Portfolio one uses all its cash to buy stock on the first day. It appreciates 15 percent before taxes every year. It doesn’t sell anything until the liquidation date, at which point it immediately pays any taxes due.


Portfolio two also uses all its cash to buy stock on the first day. It too appreciates 15 percent per year before taxes. But it churns its holdings annually. At the end of every year, it sells everything, and uses all the after-tax proceeds to instantly buy different stocks. When it liquidates after 30 years, it too promptly pays any taxes due.

Portfolio one would end the 30-year period with more money. But what’s striking is just how much more. It would wind up with over twice as much cash. That’s because every year when portfolio two paid its capital gains taxes, it whittled down the amount set to grow at 15 percent over the following year. In other words, ongoing tax payments stunted the power of compounding.

By contrast, portfolio one’s capital was never whittled down. It regularly got to multiply its 15 percent by a bigger number:

http://www.goodstockscheap.com/17.1.xlsx

Of course one could never count on an equity portfolio to appreciate at exactly 15 percent annually, and the chance of immediately finding stocks to replace just-sold ones is low. Plus the 30-year period is arbitrary, and a 30 percent tax rate doesn’t apply to everyone. But however simplified, this example
highlights the toll that frequent selling takes.


2.  The second problem with selling is alternatives. 

Companies that are understood and good don’t go on sale every day. They’re hard to find. So absent an acute cash requirement, each stock sale mandates a hunt for the next opportunity.



#When selling makes sense

Even with these problems, selling does makes sense in some instances. I see four.

(a)  The first is when price flies past value. 
If EV/OI is over 25, and there are no mitigating facts, I find it hard to justify holding.

(b) The second instance is when a company that originally registered as good turns out not to be. 
This could be because the original analysis was wrong. Perhaps the threat of new entrants was stronger than it first appeared, or a market thought to be growing really wasn’t. Or it could be because circumstances have changed. Maybe a once-mighty retail chain has come under pressure from online-only sellers, or a company that thrived under regulation has faltered in deregulation.

The cognitive bias of consistency can make it hard to see such instances. We may want to hold just to validate our buys. But analyses really can be wrong, and contexts really can change. Selling in such situations keeps a snag from ripping into both a realized loss and a missed chance to redeploy cash into a better opportunity.

(c)  The third instance is when one is bought out. 
Public companies sometimes get acquired. Such transactions often happen at a premium to the recent trading price. A vote may be put to shareholders on the matter, but for everyone other than major stakeholders, it’s perfunctory. One effectively has no say.

I’ve been bought out several times. I dislike it. It turns a pleasantly appreciating investment into a taxable event. But if profitable, given the absence of practical options, it makes sense to accept such sales.

(d)  The fourth instance is when cash is needed to make an investment that’s clearly better than one already held. 
The problem with this is that fresh ideas often glow with a special promise. They’re new. The hope bias gets a prime shot at causing mischief. As such, I get extremely suspicious of my reasoning when I think that I’m spotting such a circumstance. I’ve never actually sold one company for the specific purpose of buying another.



#When selling makes no sense

Two commonly cited reasons for selling puzzle me.

1.  One is rebalancing. 
It’s selling part of a stock holding because appreciation has caused it to represent a disproportionately large percentage of the portfolio.

Rebalancing makes sense to those who equate risk with total portfolio volatility. I don’t. So on the sell side, I’ve never seen the merits of this practice.

It makes more sense to me on the buy side, since unless part of a holding was sold, a decrease in its portfolio prominence means that its price dropped. One could now buy more of it cheaper. But on the sell side rebalancing looks to me like the anchoring bias in action.

2.  A second common reason for selling is to prove that an investment was a success (taking profits). 
The sale is seen as a sort of finish line. Underlying this perception is a view that cash is somehow more real than stocks.

It’s not. Cash and stocks are different forms that wealth can take. Unrealized gains are not endemically less concrete than realized gains. Selling doesn’t demonstrate investing competence any better than does intelligent holding.


Yet another reason for selling is Industry compensation
There’s an additional reason that selling happens. It relates only to institutional portfolios, like hedge funds. It’s about compensation.

Investment funds often pay managers 2 percent of assets under management per year, plus 20 percent of any gain above some hurdle. That 20 percent is applied to pretax returns. It’s blind to taxes. For this reason professionals may emerge as more enthusiastic about selling than would their limited partners. After all, unless they’re tax-exempt, the limited partners are the ones that come to bear the bulk of the tax liabilities born of the fund’s realized gains.

One faces great impetus to sell. It feels good. It’s conclusive. It turns the brokerage statement into a congratulations card. But it also triggers a tax expense and—short of a pressing need for cash—forces a search for the next underpriced equity.

When a sale is wise, its justification is distinct. It’s an overpricing, an analytical error, a contextual change, a buyout, or a better opportunity. Absent that clarity, I hold.



#Equity portfolio can generate cash through buyouts and dividends
Even without active selling, an equity portfolio can generate cash. It can do so in two ways.

1.  The first is through acquisitions, as mentioned earlier.

2.  The second is through dividends. 
Dividends can become sizable. This fact gets lost in the commonly quoted metric of dividend yield.

Recall that dividend yield equals annual dividends divided by current stock price. But to an owner, current only counts in the numerator.

When I first bought Nike stock, the dividend yield was around 2 percent. Over a decade later when I sold it, it was still around 2 percent. But by then my dividend yield—the current annual dividend divided by the price I’d paid for the stock—was closer to 10 percent. Dividends had gone up over time, but my cost hadn’t. That’s how dividends can become a booming cash source underappreciated by all but those who get them.



#Over time, good focused (concentrated) stock portfolios outperform diversified portfolios.
Remember that my portfolio is concentrated. It contains no more than a dozen names, and usually far fewer. On purpose, it’s not diversified. Many good equity portfolios are, but mine isn’t.


1.  Good focused portfolio versus diversified portfolio
I choose to concentrate because I’ve observed over time that good, focused stock portfolios outperform diversified stock portfolios. This is because diversified portfolios are more like an index. They have more names in them. The more a portfolio looks like an index, the more it behaves like an index. It’s hard to both resemble and outperform something.


2.  Bad focused portfolio versus diversified portfolio
Of course a bad focused equity portfolio can certainly lag a diversified stock portfolio.

Concentration isn’t enough to assure outperformance. But if it’s purposefully constructed, a focused group of inexpensively bought good companies is particularly promising.



#Sequestered Cash outside of the equity portfolio for  ordinary expenses 
While I don’t diversify within my equity portfolio, I do diversify outside of it. I always keep enough cash on hand to cover expenses for a few years. As I get older, I expect to increase this number of years.

1.  In Federally insured banks
This isn’t cash inside the equity portfolio waiting to be invested in stocks. It’s cash outside of the equity portfolio, held in federally insured banks. It will never be anything other than cash or spent.

Sequestering cash enables me to confidently ride the wild price swings guaranteed to come with a concentrated equity portfolio. It’s what lets me take the long view. When the price of my stock portfolio halved during the 2008 financial crisis, I didn’t panic. I knew that I could meet all of my expenses. There was no basis for panic.

Many governments insure bank deposits. Coverage varies by country. In America, the Federal Deposit Insurance Corporation generally guarantees up to $250,000. In the United Kingdom, the Financial Services Compensation Scheme stands behind £75,000. In Canada, the Canada Deposit Insurance Corporation backs C$100,000.

Because the whole point of sequestered cash is to avoid the scare that forces ill-timed stock sales, it’s wise to stay well under the insured limit. Opening up accounts at several different banks is not hard.


2.  In same currency as one's expenses Sequestered cash is best held in the same currency as one’s expenses. If it isn’t, foreign exchange rate fluctuations can hurt one’s ability to meet obligations.

As I write this, the British pound has slumped to a 30-year low against the U.S. dollar. This follows Britain’s decision to leave the European Union.1 Some American investors think the slump is overdone and have invested in the British pound.

To people whose expenses are in U.S. dollars, those pounds don’t count as sequestered cash. Instead, they count as a currency investment.



#These repositories for sequestered cash aren't really good
Two things that may look like good repositories for sequestered cash really aren’t.

1.   The first is certificates of deposit, or CDs. 

Outside of the United States they’re commonly called time deposits. They offer higher interest rates than do regular bank accounts. Money must stay in them for a predetermined period. If it’s withdrawn early, a penalty is applied that more than wipes out the extra interest.

If the CD interest rate is much higher than the regular interest rate, one could theoretically keep a portion of sequestered cash in CDs. The portion would have to be limited to that which shouldn’t be needed for the duration of the lockup period.

That said, I don’t use CDs. Since the timing of cash needs can surprise, I prefer to keep the focus of sequestered cash on costless accessibility.

2.   The other repository is cash-like funds (commercial paper). 
They too offer higher interest rates. An example is a fund that invests in commercial paper. Commercial paper is short-term notes issued by corporations.

Such cash-like vehicles usually behave like cash. One can pay bills with them. But I’ve seen instances when they don’t. During the financial crisis, an acquaintance of mine was surprised to learn that her financial institution had temporarily halted withdrawals from such a fund. She couldn’t make payments with it.

This potential—the inability to immediately liquidate—is the problem with these alternatives. The purpose of sequestered cash is to free one from worry during equity market gyrations. If what’s used for expenses ever can’t be used for expenses, that benefit is lost. One can wind up having to sell part of an equity portfolio when it’s underpriced, erasing the benefits of stock investing.


#Problems with cash
Cash has its own problems, of course. Inflation erodes its purchasing power over time. Expansionary monetary policies—governments printing money— exacerbate this. But if held in government-insured accounts under applicable limits, at least it’s always there. That availability is what makes the interim ups and downs of an equity portfolio’s price not only bearable, but almost trivial.





Summary
1. Conviction prepares one for the likely price drop that follows a stock buy.
2. Selling stocks can make sense 

  • price flies past value, 
  • when a company thought to be good turns out not to be, 
  • in buyouts, or 
  • when a clearly better opportunity emerges.

3. The problems with selling are taxes and alternatives.
4. Questionable reasons for selling include 

  • rebalancing, 
  • memorializing success, and 
  • industry compensation.

5. Equity portfolios can generate cash without active selling through 

  • buyouts and 
  • dividends.

6. Good focused equity portfolios outperform diversified equity portfolios over the long term.
7. Cash sequestered for ordinary expenses in government-insured accounts makes equity portfolio price gyrations less troubling.


Reference:

Good Stocks Cheap by Kenneth Jeffrey Marshall 2017

Thursday 16 January 2020

Selling: The Hardest Decision of All

Many investors are able to spot a bargain but have a harder time knowing when to sell. 

  • One reason is the difficulty of knowing precisely what an investment is worth. 
  • An investor buys with a range of value in mind at a price that provides a considerable margin of safety. 
  • As the market price appreciates, however, that safety margin decreases; the potential return diminishes and the downside risk increases. 
  • Not knowing the exact value of the investment, it is understandable that an investor cannot be as confident in the sell decision as he or she was in the purchase decision


To deal with the difficulty of knowing when to sell, some investors create rules for selling based on specific price-to-book value or price-to-earnings multiples. Others have rules based on percentage gain thresholds; once they have made X percent, they sell. Still others set sale price targets at the time of purchase, as if nothing that took place in the interim could influence the decision to sell. None of these rules makes good sense. Indeed, there is only one valid rule for selling: all investments are for sale at the right price. 




Decisions to Sell

Decisions to sell, like decisions to buy, must be based upon underlying business value.' Exactly when to sell-or buy depends on the alternative opportunities that are available.

  • Should you hold for partial or complete value realization, for example? 
  • It would be foolish to hold out for an extra fraction of a point of gain in a stock selling just below underlying value when the market offers many bargains. 
  • By contrast, you would not want to sell a stock at a gain (and pay taxes on it) if it were still significantly undervalued and if there were no better bargains available. 


Some investors place stop-loss orders to sell securities at specific prices, usually marginally below their cost. If prices rise, the orders are not executed. If the prices decline a bit, presumably on the way to a steeper fall, the stop-loss orders are executed. Although this strategy may seem an effective way to limit downside risk, it is, in fact, crazy. Instead of taking advantage of market dips to increase one's holdings, a user of this technique acts as if the market knows the merits of a particular investment better than he or she does.

Liquidity considerations are also important in the decision to sell.
  • For many securities the depth of the market as well as the quoted price is an important consideration. 
  • You cannot sell, after all, in the absence of a willing buyer; the likely presence of a buyer must therefore be a factor in the decision to sell. 
  • As the president of a small firm specializing in trading illiquid over the-counter (pink-sheet) stocks once told me: "You have to feed the birdies when they are hungry." 


If selling still seems difficult for investors who follow a value investment philosophy, I offer the following rhetorical questions: If you haven't bought based upon underlying value, how do you decide when to sell?
  • If you are speculating in securities trading above underlying value, when do you take a profit or cut your losses? 
  • Do you have any guide other than "how they are acting," which is really no guide at all?

Tuesday 3 April 2018

How Warren determines it is time to sell

HOW WARREN DETERMINES IT IS TIME TO SELL

In Warren's world you would never sell one of these wonderful businesses as long as it maintained its durable competitive advantage. The simple reason is that the longer you hold on to them, the better you do. Also, if at any time you sold one these great investments, you would be inviting the taxman to the party. Inviting the taxman to your party too many times makes it very hard to get superrich. Consider this: Warren's company has about $36 billion in capital gains from his investments in companies that have durable competitive advantages. This is wealth he hasn't yet paid a dime of tax on, and if he has it his way, he never will.

Still, there are times that it is advantageous to sell one of these wonderful businesses. The first is when you need money to make an investment in an even better company at a better price, which occasionally happens.

The second is when the company looks like it is going to lose its durable competitive advantage. This happens periodically, as with newspapers and television stations. Both of them used to be fantastic businesses. But the Internet came along and suddenly the durability of their competitive advantage was called into question. A questionable competitive advantage is not where you want to keep your money long-term.

The third is during bull markets when the stock market, in an insane buying frenzy, sends the prices on these fantastic businesses through the ceiling. In these cases, the current selling price of the company's stock far exceeds the long-term economic realities of the business. And the long-term economic realities of a business are like gravity when stock prices climb up into the outer limits. Eventually they will pull the stock price back down to earth. If they climb too high, the economics of selling and putting the proceeds into another investment may outweigh the benefits afforded by continued ownership of the business. Think of it this way: If we can project that the business we own will earn $10 million over the next twenty years, and someone today offer us $5 million for the entire company, do we take it? If we can only invest the $5 million at a 2% annual compounding rate of return, probably not, since the $5 million invested today at a 2% compounding annual rate of return would he worth only $7.4 million by year twenty. Not a great deal for us. But if we could get an annual compounding rate of return of 8%, our $5 million would have grown to $23 million by year twenty. Suddenly, selling out looks like a real sweet deal.

A simple rule is that when we see P/E ratios of 40 or more on these super companies, and it does occasionally happen, it just might be time to sell. But if we do sell into a raging bull market, then we shouldn't go out and buy something else trading at 40 times earnings. Instead, we should take a break, put our money into U.S. Treasuries and wait for the next bear market. Because there is always another bear market right around the corner, just waiting to give us the golden opportunity to buy into one or more of these amazing durable competitive advantage businesses that will, over the long-term, make us super superrich.

Just like Warren Buffett.