Showing posts with label selling too soon. Show all posts
Showing posts with label selling too soon. 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. :-)




Thursday 28 January 2010

When to Buy, When to Sell: Value Investors Buy too Soon and Sell too Soon

The notion that an investor can buy a stock that has reached the bottom of its fall is a fantasy.  No one can accurately predict tops, bottoms, or anything in between. 

More often than not, value investors will start to buy a stock on the way down.  The disappointments or reduced expectations that have made it cheap are not going away anytime soon, and here will still be owners of the stock who haven't yet given up when the value investor makes an initial puchase.  If it is toward the end of the year, then selling to take advantage of tax losses can drive the price even more.  Because they are aware that they are - to use the industry cliche - catching a falling knife, value investors are likely to try to scale into a position, buying it in stages. 
  • For some, such as Warren Buffett, that may not be so easy.  Once the word is out that Berkshire Hathaway is a buyer, the stock shoots up in price. 
  • Graham himself, Walter Schloss recounts, confronted this problem.  He divulged a name to a fellow investor over lunch; by the time he was back in the office, the price had risen so much that he could not buy more and still maintain his value discipline. 
  • This is one of the reasons why the Schlosses limit their conversations.

Still, when asked to name the mistake he makes most frequently, Edwin Schloss confesses to
  • buying too much of the stock on the initial purchase and
  • not leaving himself enough room to buy more when the price goes down. 
If it doesn't drop after his first purchase, then he has made the right decision. 
  • But the chances are against him. 
  • He often does get the opportunity to average down - that is, to buy additional shares at a lower price. 
  • The Schlosses have been in the business too long to think that the stock will now oblige them and only rise in price. 
Investing is a humbling profession, but when decades of positive results confirm the wisdom of the strategy, humility is tempered by confidence.

Value investors buy too soon and sell too soon, and the Schlosses are no exceptions. 
  • The cheap stocks generally get cheaper. 
  • When they recover and start to improve, they reach a point at which they are no longer bargains. 
  • The Schlosses start to sell them to investors who are delighted that the prices have gone up. 
  • In many instances, they will continue to rise, sometimes dramatically, while the value investor is searching for new bargains. 
  • The Schlosses bought the invetment bank Lehman Brothers a few years ago aat $15 a share, below book value.  When it reached $35, they sold out.  A few years later it had passed $130.  Obviously that last $100 did not end up in the pockets of value investors. 
  • Over the years, they have had similar experiences with Longines-Wittnauer, Clark Oil, and other stocks that moved from undervalued through fair valued to overvalued without blinking. 
  • The money left on the table, to cite yet another investment cliche, makes for a good night's sleep.

The decision to sell a stock that has not recovered requires more judgement then does selling a winner.  At some point, everyone throws in the towel. 
  • For value investors like the Schlosses, the trigger will generally be a deterioration in the assets or the earnings power beyond what they had initially anticipated. 
  • The stock may still be cheap, but the prospects of recovery have now started to fade. 
  • Even the most tolerant investor's patience can ultimately be exhausted
  • There are always other places to invest the money. 
  • Also, a realized loss has at least some tax benefits for the partners, whereas the depressed stock is just a reminder of a mistake.

Footnote: 
Over the entire 45 year period from 1956 through 2000, Schloss and his son Edwin, who joined him in 1973, have provided their investors a compounded return of 15.3% per year. 

For the nine and a half years that Walter Schloss worked for Ben Graham and for some years after he left to run his own partnership, he was able to find stocks selling for less than two thirds of working capital. But sometime after 1960, as the Depressin became a distant memory, those opportunites generally disappeared. Today, companies that meet that requirement are either so burdened by liabilities or are losing so much money that their future is in jeopardy. Instead of a margin of safety, there is an aura of doubt.