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Tips needed on how to think about selling.


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After looking at the last three years I've found that out of all of the possible mistakes I could make the bigly (trump) one is that I sell too early. This year I bought tse at 23, sold at 34.50, 10% position, nc at 44, sold at 59 10% position, pcln at 1000 10%, sold at 1300 for example. They are now at tse 55, nc 92, pcln, 1550. I'm up 16% this year while averaging a 30% cash position in my equity portfolio, had I sat on my hands I would be up 30-40% plus with a 10 stockish portfolio. Basically, my hit rate (if I hold) is 4/5 picks go up 20-100% within 12 months when looking at the last three years. If I can get myself to sit on my hands, I'd be absolutely killing it however I'm just slightly outperforming (5-10% a year since 2012). The good news is I'm buying right, the bad news is I'm apparently psychologically weak.

 

When I look at this year, I know I sold the three listed above because the returns were pretty great and it all happened quite quickly (1-3 months). At the time I was nearly fully invested in my equity portfolio (40% of net worth) and the selling rationalization went something like, "do I want to wait 10 months for cap gains?", "Am I comfortable being fully invested in this market", "these stocks aren't that cheap anymore anyway". It seems I think critically when buying and not so much when selling.

 

I just did this again with keys bought at 28, bld at 30, and rlgt at 2.74, I couldn't hold them and they are all up 20-40% plus in a matter of months. I absolutely hate admitting this because I like to think of myself as disciplined and rational. I don't seem to be able to hold more than about half my portfolio for 1 year +.

 

Certainly some of you have more experience with this and have some tips/tricks/mental models to deal with this sort of thing. Hopefully I've articulated the issues I'm facing. I'm just so frustrated with myself because I feel like if I could just master this one issue I'd go from good to great but I keep repeating this same mistake. Marrying 40 hours a week of researching companies with sitting on ones hands is proving quite difficult.

 

 

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https://www.amazon.com/When-Sell-Strategies-Stock-Market-Publishing/dp/0870341340

 

Although I disagree with his philosophy, I think many of his ideas are very helpful. It is very difficult for value investors to think this way, but when a stock is going up it means that there is strong demand for the stock. Which means the stock is likely to go up further.

 

We saw this recently with BAC. All the value investor on that thread were eager to sell when it hit $18. After those shares were absorbed, buyers needed to raise their bids.

 

I have had some success buying more AFTER my value instincts tell me to sell.

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https://www.amazon.com/When-Sell-Strategies-Stock-Market-Publishing/dp/0870341340

 

Although I disagree with his philosophy, I think many of his ideas are very helpful. It is very difficult for value investors to think this way, but when a stock is going up it means that there is strong demand for the stock. Which means the stock is likely to go up further.

 

We saw this recently with BAC. All the value investor on that thread were eager to sell when it hit $18. After those shares were absorbed, buyers needed to raise their bids.

 

I have had some success buying more AFTER my value instincts tell me to sell.

 

Sweet. Thanks buddy. On it's way.

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I've generally moved to buying/selling in waves to avoid this as I'm inevitably too early with either in most of my decisions.

 

Two strategies that I've employed to help prevent this is:

 

1) Buy/Sell in fractions - if a position moves up strongly and I'm starting to think it's reaching fair value, sell a portion. I typically sell the first portion in some increment between 10-30% of the entire position depending on how close it is to my estimate of fair value, how far the fundamentals have improved relative to the price, and how comfortable I am holding it. I typically demand another 10% price gap before allowing myself to sell another portion.

 

2) Covered Calls - if a stock price moves dramatically towards you price target (say on earnings results), I'll often sell covered calls against a portion of the position with strike prices 10-15% above the current price AFTER the initial rally. This forces you to hold on a little longer than you may traditionally hold allowing further exposure to the upside and allowing for premium income to decrease some of the downside.

 

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I might buy what I think is a great business intending a long term holding, or what I think is a company looking for a catalyst intending to hold until the catalyst happens. In either case I will try to hold until my original thesis is proven wrong. I try to not let price movement affect my analysis because a great company that becomes more expensive is still a great company, and a company that I still expect to have a catalyst should still be attractive unless the catalyst becomes unlikely even as it appreciates

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First, categorize them.  Do you own a multi-year compounder?  Do you hold an asset play (50% of intrinsic, but intrinsic won't go up too much over time) or do you hold a call options where time is the most important element? 

 

With a multi-year compounder, when the stock work it could be because the rest of the market realize the long term prospect of the company.  Your company may have network effects, pricing powers as it grows larger, etc.  In this case, you have to ride your winners.  In a way, you have to think of a 10 year holding horizon and apply a discount rate and decide if today's price is still attractive.  Goog, FB, Amazon tend to fall into this category. 

 

Asset play - I tend to own this type of asset.  For example, I know company A owns X amount of real estate.  I know what's it's worth if it's sold today.  The cash on cash return is the cap rate of the RE asset.  At a 50% of intrinsic value, I'm comfortable holding X%, at 70%, I'm comfortable holding Y%, at 85%, I don't want to hold any shares.  This is perhaps the easiest to add/trim.  You simply ask yourself "If I don't own any today, would I buy any and how big would I size it?" It becomes very easy for me to add when the shares trade down and trim when the shares trade up for this category of value investment. 

 

Calls/melting ice cubes - I'm still trying to figure this category out.  It's tough. 

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We use a concentrated equity portfolio, 4-5 assets at most - including preferred & cash.

 

We expect to have to double, or even triple down, on initial purchases - to a maximum 50% of the portfolio. The additional purchases will be margined against the whole portfolio, & the expectation is no further trades for 12 months; the monthly interest charge is a reminder we've screwed up. We then either sell 25% of the position on a double within the year, or enough to pay off the margin at the end of the 12 months. Depending on 'view', we may overlay a long or short trading position on the same equity. 

 

Ultimately there will be some further opportunistic sales to recover our initial investment, & the preferred position will pile up.

When it gets to around 75-100% of original capital we liquidate & withdraw the funds. 

 

On a net basis there may be 15-25 trades a year, depending on how much hedging we do (sell & buy of the stock itself).

We find it is enough to contain the urge to trade, and limits the total all-in cost for a year to about $250-350.

 

SD

 

 

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I have a sell price in mind before I buy based on different scenarios.  If the stock moves beyond my sell price and the business is performing better than expected, I hold on to my position.  Otherwise, I sell or write covered calls if I can't identify a good reason for the stock to be worth more.

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We use a concentrated equity portfolio, 4-5 assets at most - including preferred & cash.

 

We expect to have to double, or even triple down, on initial purchases - to a maximum 50% of the portfolio. The additional purchases will be margined against the whole portfolio, & the expectation is no further trades for 12 months; the monthly interest charge is a reminder we've screwed up. We then either sell 25% of the position on a double within the year, or enough to pay off the margin at the end of the 12 months. Depending on 'view', we may overlay a long or short trading position on the same equity. 

 

Ultimately there will be some further opportunistic sales to recover our initial investment, & the preferred position will pile up.

When it gets to around 75-100% of original capital we liquidate & withdraw the funds. 

 

On a net basis there may be 15-25 trades a year, depending on how much hedging we do (sell & buy of the stock itself).

We find it is enough to contain the urge to trade, and limits the total all-in cost for a year to about $250-350.

 

SD

 

 

 

I disagree, you should sell when you liquidate 75% of the total portfolio up to half of the buy and sell. The other 50% should be held on a 12 month rolling basis, up to half the weighted average on a buy or short ratio.  Keep in mind, to optimize the optimization you need to leverage with a full hedge. 

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After looking at the last three years I've found that out of all of the possible mistakes I could make the bigly (trump) one is that I sell too early. This year I bought tse at 23, sold at 34.50, 10% position, nc at 44, sold at 59 10% position, pcln at 1000 10%, sold at 1300 for example. They are now at tse 55, nc 92, pcln, 1550. I'm up 16% this year while averaging a 30% cash position in my equity portfolio, had I sat on my hands I would be up 30-40% plus with a 10 stockish portfolio. Basically, my hit rate (if I hold) is 4/5 picks go up 20-100% within 12 months when looking at the last three years. If I can get myself to sit on my hands, I'd be absolutely killing it however I'm just slightly outperforming (5-10% a year since 2012). The good news is I'm buying right, the bad news is I'm apparently psychologically weak.

 

When I look at this year, I know I sold the three listed above because the returns were pretty great and it all happened quite quickly (1-3 months). At the time I was nearly fully invested in my equity portfolio (40% of net worth) and the selling rationalization went something like, "do I want to wait 10 months for cap gains?", "Am I comfortable being fully invested in this market", "these stocks aren't that cheap anymore anyway". It seems I think critically when buying and not so much when selling.

 

I just did this again with keys bought at 28, bld at 30, and rlgt at 2.74, I couldn't hold them and they are all up 20-40% plus in a matter of months. I absolutely hate admitting this because I like to think of myself as disciplined and rational. I don't seem to be able to hold more than about half my portfolio for 1 year +.

 

Certainly some of you have more experience with this and have some tips/tricks/mental models to deal with this sort of thing. Hopefully I've articulated the issues I'm facing. I'm just so frustrated with myself because I feel like if I could just master this one issue I'd go from good to great but I keep repeating this same mistake. Marrying 40 hours a week of researching companies with sitting on ones hands is proving quite difficult.

 

Q: How do you know you made a mistake? 

 

A: Maybe you didn't.  Maybe you got out when YOU should have. 

 

My biggest selling mistake was in late 2009 and 2010 when I sold my calls on HD, SBux, and Axp rather than calling the stock and holding.  There was a very messy backdrop but I wish I had held.  I had Ge and WFC as well which have not done nearly as well, but probably better than some of my later investments. 

 

You really need to define what kind of investor you are. 

 

Later Buffett: buying compounders, where there is supposed to be no sell decision even though he gets caught sometmes.

 

Walter Schloss: He bought cheap and set sell targets.  He did better than 15% for eternity for his partners.  He would always sell at the target.  He stated that if they kept going up that was okay, and the next guy needed to make some money too.  He wanted companies to suceed.  There used to be a class where he lectured posted in the Ben Graham value investing school website. 

 

My goal after 2013-14 has been to try and buy compounders when something has gone wrong (macro or micro) and never sell.  I am pre-identifying them so I can buy when they get cheap. 

 

addendum: I took a quick look at tse, nc, and pcln.  Two look to be fairly cyclical (tse, and nc), and pcln is to my mind unpredictable, operates in a commodity style envrionment.  So, I believe you did the right thing, if its any consolation.  Sometimes, what I will do in these situations is to take money off the table as I go.  16% in a year, while holding all that cash is nothing to sneeze at. 

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We use a concentrated equity portfolio, 4-5 assets at most - including preferred & cash.

 

We expect to have to double, or even triple down, on initial purchases - to a maximum 50% of the portfolio. The additional purchases will be margined against the whole portfolio, & the expectation is no further trades for 12 months; the monthly interest charge is a reminder we've screwed up. We then either sell 25% of the position on a double within the year, or enough to pay off the margin at the end of the 12 months. Depending on 'view', we may overlay a long or short trading position on the same equity. 

 

Ultimately there will be some further opportunistic sales to recover our initial investment, & the preferred position will pile up.

When it gets to around 75-100% of original capital we liquidate & withdraw the funds. 

 

On a net basis there may be 15-25 trades a year, depending on how much hedging we do (sell & buy of the stock itself).

We find it is enough to contain the urge to trade, and limits the total all-in cost for a year to about $250-350.

 

SD

 

 

 

It's difficult to wait for that first double on the fully hedged portfolio of 4-5 leveraged and optimized positions (netted out, of course).  I find that writing BS on message boards helps pass the time -  it's easier than sitting on my hands.

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Think of a portfolio of 4 assets (A, B, C, D), each worth $10, each marginable, each a 25% weighting. Total investment of $40. For example purposes, only the value of Asset A changes.

 

Asset A is 1 share of XYZ coy, bought at $10

- The price drops 1/3 to $6.67, you double down. Another $10 for 1.5 shares at $6.67, bought on margin.

- The price drops another 1/3 to $4.45, you double down again. Another $10 for 2.25 shares at $4.45, bought on margin.

- Asset A is now 4.75 shares at $4.45 worth $21.14, Assets B through D are worth $30, total portfolio is $51.14. Asset A is 41% of the portfolio, and the portfolio is 39% margined (20/51.14) x 100%. A very dangerous & unhealthy place to be.

 

A double for Asset A is only $8.90 – not $20; a 25% (1.19 shares) sale of the position at $8.90 will reduce margin by $10.57. Your expectation is that Asset A is worth > $10, if it just reaches $10 you still have 3.56 shares of Asset A worth $26.17 (35.60- 9.43 of remaining margin). A very good place to be.

 

If nothing further happened during the 12 months; 2.25 shares of Asset A would be sold to repay the margin, leaving 2.50 shares. As the expectation is still that Asset A is worth >$10, it remains a very good place to be.

 

Obviously if one of Asset B though D is a cash equivalent, margin is reduced. If you thought Asset A is no longer what it was, you would sell it completely. When you think Asset A is getting overvalued, simply sell enough to recover your capital, & let the rest ride – it is house money.

 

Sure you have to wait, there is risk, & nothing is guaranteed.

That is just life in general.

 

SD

 

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You guys are fucking idiots for thinking about selling. If you're not thinking of holding for at least 100 years out, you're not a real investor. Real investors don't sell; they pick long-term winners.

 

Yeah man, I time traveled back in time to 1902 and bought some of that Standard Oil.

 

Now I could retire if I could just persuade idiots at JP Morgan that the safe deposit box with stock certificates is really mine.

 

Not planning to sell anytime soon in the next couple hundred years. We'll need oil to go to the stars I'm sure.

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You guys are fucking idiots for thinking about selling. If you're not thinking of holding for at least 100 years out, you're not a real investor. Real investors don't sell; they pick long-term winners.

 

Stoned again Scott?

 

It's legal now in CA  8)

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You guys are fucking idiots for thinking about selling. If you're not thinking of holding for at least 100 years out, you're not a real investor. Real investors don't sell; they pick long-term winners.

 

Yeah man, I time traveled back in time to 1902 and bought some of that Standard Oil.

 

Now I could retire if I could just persuade idiots at JP Morgan that the safe deposit box with stock certificates is really mine.

 

Not planning to sell anytime soon in the next couple hundred years. We'll need oil to go to the stars I'm sure.

 

Another miracle of 2016. Jurgis and I agreeing on something.

 

This is the exact right way to think about building the foundation for dynastic wealth. We should all invest in long term assets like the endowments buying timber and highly-levered private equity funds. That's the way real dynasty-building wealth is obtained. You have to have the "capacity to suffer" to get ahead long term.

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Maximal suffering is approached when you buy the wrong thing at the wrong price on two times margin but you are absolutely certain it's the right thing and the right price.

 

That's the difference between 2 times margin and 10 times margin. At 2 times margin, the bank owns you. At 10 times margin you own the bank!!!

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Maximal suffering is approached when you buy the wrong thing at the wrong price on two times margin but you are absolutely certain it's the right thing and the right price.

 

That's the difference between 2 times margin and 10 times margin. At 2 times margin, the bank owns you. At 10 times margin you own the bank!!!

 

Which is why we lever at 2 and not 10. Nobody wants to own a bank in this age...

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Maximal suffering is approached when you buy the wrong thing at the wrong price on two times margin but you are absolutely certain it's the right thing and the right price.

 

That's the difference between 2 times margin and 10 times margin. At 2 times margin, the bank owns you. At 10 times margin you own the bank!!!

 

Which is why we lever at 2 and not 10. Nobody wants to own a bank in this age...

I want to own a bank! Especially before this recent run up when everyone was so negative on the sector

 

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I have an absolute terrible framework for selling. It's def my biggest weakness as an investor.

 

The way I think about it is I am a business owner. Now does it make sense to sell. All the bullshit about selling when it gets to intrinsic value or 90% of intrinsic value or all the games about selling half or selling this much and then this much I don't really seem to think makes much of an impact and just gets you caught up in psychological games.

 

I own Brookfield Asset Management. I think it has a possibility of being a great multi-bagger. I'll go to sleep and wake up in 10 years and take a look. Same with POSCO. I think POSCO can be dead money or could be a great multi-bagger. Occasionally I'll sell something if it's obviously overpriced. Other than I don't really have much of value to add.

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I routinely sell.  I know some buy and hold forever investors, but that's not myself.

 

When I enter a position I am thinking about the exit.  When the position appreciates I sell.  The business might be doing great and I still sell.  I've been burned more times by holding when the thesis has changed from "worth 90% of BV selling at 40% to great business that should grow/compound."  So I stick to what I know.  I know how to buy cheap, when it becomes fairly valued I sell.

 

In a very few rare cases I continue to hold names for years with no intent on selling.

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I'm thinking your problem may be that you buy companies too close to (your estimate) of fair value. I couldn't estimate a fair value for Priceline, but if I thought I could I'd still want more upside than 30 pct. I've sold a couple of positions this year for 20-30 % gains, but that was due to changes to the thesis (due mostly to mistakes on my part/wrong thesis to begin with). I sold a couple of positions too early this year when I resort to monday morning quarterbacking  (BCOR after a double, would've been a triple as well as DirectCash just before buyout) but I think my proces was decent - at least the sell decision. So I don't sweat over it but go hunting for new buys instead and am just happy I now have more capital to put to work.

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