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."

http://myinvestingnotes.blogspot.com/2012/07/my-18-points-guide-to-successfully.html

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. :-)

Emotional Intelligence

You don’t need to be a rocket scientist. 

Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.

This is also what Buffett says. 

Of course, some knowledge about finance is important before investing in the stock markets, but this knowledge alone won’t be of any help to you.

What you also need is emotional intelligence while investing in stock.

Emotional intelligence is the ability to identify, assess, and control your own emotions.

Have the Discipline to Say No

1.  A particular security is selling in the market for $25 a share.

2.  The strong fundamental qualities of this security are well known, and as a result, the stock has typically traded at a fair to overvaluation.

3.  At the current price of $25 a share, the stock is indeed slightly above fair value.

4.  Eager to buy, an investor is on constant watch for any dip in stock price, but the dip never comes.

5.  Instead, over the next few weeks the stock seems only to go up in price and is now at $35.

6.  Not wanting to miss out on the continued rise, the investor rushes to buy in.

7.  In the next few weeks, the stock is back at $25 and the investor, an able and bright fellow, feels like the dumbest man on the planet.

8.  His downfall had nothing to do with intelligence.

9.  Instead, it had everything to do with emotions dictating the investment decision.

10.  Whether the security will trade above his purchase price a year from now is irrelevant.

11.  Even if that happens, it's just foolish to dismiss the investment as an intelligent one because the investment process was manipulated by emotional decision making.  

12.  Next to taking a loss, nothing is more painful than the aforementioned chain of events.

13.  Learning to say no until the price is right is of paramount importance.


Referring to the above example, the ultimate failure (or success) of the investment decision was not based on intelligence but on emotion. The investor could not allow himself to "miss" the continued rise in the price of stock.  Disregarding any fundamentals whatsoever, he made the assumption that because the shares had continued to go up for weeks, they would continue to do so.  What is important here is not the investment performance but rather the process employed to make the investment.

Discipline is what separates sensible market loss from foolish market loss.  If you are disciplined and your approach to investment is sound and businesslike, your winners will more than compensate for your losers.  The undisciplined investor is the one who racks up losses similar to the example given earlier.  Succumbing to investment losses in this manner can mean the difference between an above-average and a below-average investment track record.

In cases like this, be disciplined enough to walk away and search elsewhere.  Always remember that any business is undervalued at one price, fairly valued at another, and overvalued at yet another.  The intelligent investor's goal is to buy at the undervalued price, avoid at the fairly valued price, and sell at the overvalued price.  Only by maintaining a very disciplined approach can this strategy be carried out effectively.

The Neuroscience of Emotions

Your emotion controls how many returns you can get

Your emotion controls how many returns you can get

Over the period of investing, common mistakes which I think the investor made can be categorized into few:

1. Data Analysis

2. Emotion

Data analysis can be also sub-categorized to Fundamental / Technical perspective or even Macroeconomic perspective. You can learn from many ways to improve your analytic skills before you made a very good investment. However, emotion plays a bigger part to determine how many returns you can get.

There are various theories which teach investors to buy at a lower point and sell at the higher point. However, due to the greed and fear factor, investors require a very strong self discipline to follow the framework they have set and not to 'Buy High' and 'Sell Low' due to market crash.

There are few players which I conclude as Institutional Investors, Retail Investors & Speculators in this market. When market crash, we will see a huge outflow from the market due to the panic sell. Even fund managers or institutional investors are also forced to liquidate their portions in the markets due to redemption made by the retail investors and caused that their performance will follow the benchmark. Speculators will start "Short"ing the market and tried to earn a huge profits from there and make the situations become worse.


How to control your emotions depends on how your investment strategy/asset allocation works. Most people will reserve an emergency funds for the panic sells purchase. There are also short term investors who just trade during the boom markets and tries to earn a quick profit. There are also long term investors who are fully invested in the market regardless how the market moves upwards or heading south. If you have an asset allocation and portfolio rebalancing plan, you must exercise your plan regardless how your emotion tried to control you to do the other way round.

People who are afraid to see unrealized losses are the one who are also afraid to see unrealized gain. Their mentality is still "Investing = Gambling". If you have this mindset, you will just run away when you earn a bit profit but will quickly cut lose if you see your purchase price is lower than market price.

So, try to control your emotion and learn from the mistake you made earlier. Find a proper asset allocation plan as well as develop your stocks picking skills so that you can avoid to be controlled by your emotion.

Good Luck!

http://www.jackphanginvestment.com/2011/03/your-emotion-controls-how-many-returns.html

Phrases of Market Phases

Investing in the markets is not suitable for everyone.One should have a strong stomach when markets dive and not get carried away with greed when markets soar.The chart shows the various stages of emotions that most investors experience with investing in equities.


http://topforeignstocks.com/category/strategy/page/2/

The cycle of market emotions

I find this a good depiction of mass human psychology in the stock market. Look at how most of the investors feel when they are riding up a bull run – “excitement”, “thrill”, and “euphoria”! Alan Greenspan would have called it irrational exuberance. It is indeed the greed and behavior of the investors that drove the price up into a self fulfilling prophecy – the share price is going up, let’s invest. The more money gets thrown into the market, the higher the share prices go. The masses continue to do it to a point that no more greed is able to sustain the run.

When the downturn begins, many (denial) investors will want to ‘believe’ they have made the right investments and will continue to ‘believe’ the stock will rebound. Often, they will call themselves long term buy and hold investors when they admit that a short term gain is not realized.

As the downturn worsens, “fear”, “desperation” and even “panic”, create another self fulfilling prophecy – the share price is falling, we need to sell. The more they sell, the more the prices will drop.

So how do you capitalize on market emotions? It really depends on what kind of investor you are. I believe there are 2 kinds of investors that will probably make the best out of such situations.

Value Investing

The first would be the value investors. The point where they are likely to make investment will be between “capitulation” and “depression”, also denoted in the diagram by “point of maximum financial opportunity”. The fact that I stated a region rather than a point is because I believe not all value investors are able to locate the point where market bottoms, and it would be already profitable by buying around the region of bottoms. Thereafter, they will wait out for the next bull run to sell for profits.

It is apparent that the person who came out with this diagram is a value investor since he feels that the maximum opportunity is at the bottom of the market. Trend followers on the other hand, would see opportunities throughout the cycle.

Trend Following

Trend followers would follow the crowd riding up the bull run. The difference between them and the mass investors is that they will liquidate their stock holdings when the market begins to reverse, while the mass investors will still hold on to their stocks. After confirming the downtrend is valid and strong, trend followers would short the market, making money as the stock prices go down. Hence, trend followers are able to make money in both up and down markets, bull and bear runs.

http://www.bigfatpurse.com/2008/12/cycle-of-market-emotions/

The process of deciding to sell a stock is a difficult one unless an investor has developed a methodology.

The process of deciding to sell a stock is a difficult one at best unless an investor has developed a methodology and adheres to it mechanically in order to avoid inevitable internal mental battles.  

When a loss is involved, the sell decision is even more difficult because the issue of pain-avoidance is now present.

It is human nature to seek self-preservation, and pain is a phenomenon that indicates a danger to well-being.

Some investors are obsessed with safety, but most are reasonably balanced in their tolerance of the risk involved in earning a profit.  But every investor has some threshold at which pain is avoided, sometimes at ridiculous cost.  

Dealing with an investment or trading loss involves not only financial pain, but also ego pain.  A majority of shareholders at some point attempt to avoid both pains by failing to deal with the reality of their losses.  

One of the most convenient ways to avoid the pain of loss - or even of profit squandered - is denial.  They prefer not to think about it, or they minimize it.  

When specific stock positions go bad, the pain-avoider becomes a longer-term holder who is more accurately a collector of stocks.  He has no real investment motive or astuteness of value judgement and is, in fact, simply denying the pain of potential loss.

Should you panic? Advice for mum and dad investors

Should you panic?
RICHARD WEBB
May 23, 2010

IT WAS like someone rang a bell. Just before 11am on Friday the waves of panic selling that had been demolishing Australian share prices dried up and bargain hunters came out of the woodwork.

Stocks did an abrupt about-face and, after being 3 per cent down in early trade, clawed their way back to be almost level by Friday's close. You could hear the sighs of relief all the way along Collins Street.

These days, financial markets recover almost as quickly as they fall, and local shares, even after Friday's intra-day recovery, remain 15 per cent or so below their April highs. They are sitting at historically cheap valuations.

So what should mum and dad investors do?

• Jump into the sharemarket, buying with their ears pinned back to ride a swift market recovery? 
• Should they loosen off their share load on expectation of more falls to come as we head into ''Global Financial Crisis II - Europe falters''? 
• Or should they simply sit tight and ride out the volatility until things become a little clearer?

The answer is, of course, none of these. Shares are for the medium to long term and you should not try to second-guess short-term market moves. Traders don't often get it right and they do this for a living.

If you are looking to buy, then look to the long term. It should also be a long-term view that governs your decision to sell, rather than panic over the market falling for a few weeks.

As Austock senior adviser Michael Heffernan puts it, the problem is that once panic prevails, logic goes out the window.

''This is not September/October 2008, but the sharemarket is driven by fundamentals and sentiment, and sentiment is the predominant driver at the moment,'' Mr Heffernan says. ''Cooler heads might perceive we have reached a low point but the market has a mind of its own at the moment and it will defy rationality.''

He says that if you have a portfolio of solid, dividend-paying, blue-chip shares and are risk averse, then ''I would recommend you ride this out and just wait and see.

''If you are looking to buy, and I generally like to buy when the market is going up rather than trying to pick a bottom, I wouldn't be necessarily going head over heels into any sector just yet, but I would suggest you look at the banks, major retailers and mid caps. I would wait until after the election before getting back into the big resources stocks or Telstra, though.''

Pengana Emerging Companies fund manger Ed Prendergast agrees on the mixed market sentiment.

''It's murky at the moment and at times like this it's dangerous to be too definitive.

China may be slowing, Greece is clearly an issue and the resource super profits tax is adding fuel to the fire in our market, but it's hard to see this escalating into another GFC - I would be totally surprised by that,'' Mr Prendergast says.

''At the moment it feels like a lot of people trying to get out of a burning cinema and they are all trying to squeeze through the one door - but if you are taking a medium-term view you shouldn't be fazed too much by the short-term volatility; nothing has changed for many Australian companies but their share price.''

So if Mr Prendergast's mum wanted to invest in shares right now, what would he recommend? ''I would still say she should buy but not invest all of her money in one day - I would say some now, some in three weeks' time and some three weeks after that. That way you've got more time to assess the risks.''

Sean Conlan, senior adviser with Macquarie Private Wealth, says the recent selling in the market was almost entirely driven by foreign investors taking profits - which is also why he believes the Australian dollar took such a pounding as they moved their money out of the country.

''There has been a lot of offshore money parked in Australia as it was considered a safe haven through the global financial crisis and as a bet on China,'' he says.

''But triggered by the announcement of the resource super profits tax, these major overseas funds all decided to take their profits and get out - it's not really been panic selling but a reweighting by foreign investors.''

Mr Conlan says local shares are now cheap, trading at a forward price-earnings ratio of 12.8 times, against the local market's long-term average of 14.6 times.

''It's going to be volatile going forward for a while but there is an opportunity to take advantage of the current value showing in the market.''

The confidence crunch

Why is it so?



■Greece and Portugal sovereign debt concerns: will the $US1 trillion German-backed Greek rescue package work?

■Tighter banking legislation in the US approved on Thursday in response to the subprime debacle: will it constrain the US banking system?

■US economic recovery worries: is employment growth petering out?

■Criminal action against Goldman Sachs: fears over the implications.

■Economic tightening in China: has it gone too far given that property prices in Beijing have fallen 20 per cent and what does this mean for commodity prices long-term?

■Resources tax: what does it mean for our best-performing industry?

■The ash cloud over Europe and the oil spill off the US: both have had major negative economic and environmental implications.

Source: The Age

http://www.smh.com.au/business/should-you-panic-20100522-w2t1.html

Here is a technique to learn more about your buying and selling decision making.

You may separate all the months the market went up from the months the market went down.  Do this from the year 2005 to now, which includes the 2008 severe bear market.

From your CDS account statements, you can find out whether you were a net buyer or a net seller during these various months.

• If you were a net buyer during the months the stock market declined, you are more likely to be a contrarian.  
• But if you were a net buyer when the stock market did well, you may have a herd mentality.

Actual reversal to upside price action requires intervention by interested buyers.

Big and persistent buyers must overpower sellers to push stock's price higher

In any speculative market, a snowball that starts going downhill tends to keep going.

Prices swing emotionally from overvaluation to undervaluation. The extent of overshooting on each side is impossible to predict because it is driven by volatile emotions.

So an investor's first job is to become smart enough to realise that the market gyrates and then to get out of the way before the pendulum swings adversely.

While stocks do not always accelerate in decline as an easy telltale signal of having bnttomed, it is universally true that an actual reversal to upside price action requires intervention by interested buyers.

Such buyers must be big and persistent enough first to stop the price decline and then to stabilize the price against any trickle of further selling that results from boredom.

Finally, they must overpower sellers on an ongoing basis to push the stock's price higher.

With literally thousands of stocks available to buy, once a company becomes troubled in the collective opinion of the market, it will take considerable time and probably some notable events for improved prices to hold.

A crisis mentality among investors

Professionals, even the most seasoned, have the same emotions as everyone else. Learning the ropes professionally does not eliminate human emotion, nor does it elimate urges to buy or sell emotionally. Faced with uncertainties, the tide of emotion surges. How can one resist the surging tide of emotion? Only if one has a framework of disciplines and knowledge within. Controlling emotions and replacing them with the elements of this framework are the secret.