Tips needed on how to think about selling.

[Dynamic]

For me, I like to buy quality companies with the ability to compound reliably at a low price. My discipline about the low price is now greater than it was before, but I still think I'm paying a fair price for a great company when it's priced like a fairly average company, rather than a dirt cheap price for a fairly average company. I'm also happy to concentrate my portfolio in such quality companies.

 

I was comfortable with holding for the long term with benign neglect since about 2003, but I'm now adding more capital and managing a little more actively, though still with caution, especially as I've returned to adding funds to my portfolio, which had previously been tied up in business. It's too early to tell if I've been lucky or smart with my trades. Also I try to price my trades rather than time my trades, though it might look like the same if I'm disciplined enough about price/value.

 

As for selling, I have three selling strategies in mind:

 

Type 1. To sell if I think I was wrong about my initial investment thesis and the company's long-term prospects. I've done this in good time in a couple of cases in the early 2000s and made a modest profit before reinvesting in BRK.B, but I was far too late in the case of Johnston Press (JPR in London), a local newspapers group where I lost most of my original investment when the picture changed for good.

 

Type 2. To sell or trim back on quality companies and switch to cash only when they're enormously overvalued and require perfect execution to obtain even a sub-10% return or they form an uncomfortably large portion of my portfolio (e.g. 50% in most cases, though I'm happy to hold Berkshire to 100%). I have never actually done this sort of trade, but I might if I felt valuations were too extremely high, though this could be 3 or 4 times my buy price.

 

Type 3. To sell a rather fully-valued share to buy (or buy more of) a cheap share at or below my buy threshold. I've done a few such trades recently where I believe I'm trading up the amount of intrinsic value in my portfolio and thereby increasing the low-end valuation of my portfolio to be nearer the market valuation (low-end valuation is my opinion of a soft approximate price floor where I'd expect value investors to purchase sufficiently to prop-up the price). This would hopefully improve its resilience against market declines, though I've yet to really have this notion put to the test.

 

Type 3, Example 1: I sold a 10-15% weighted position in Halma plc (HLMA in London) that had earned me over 14% compound since buying in Oct 2001 at a P/E around 29 (3.4% earnings yield) which I felt was rather high, though not ludicrous enough to make me sell to cash. With the proceeds, plus cash accumulated partly from its dividends, I immediately purchased Berkshire Hathaway (BRK.B) in February 2016 at £85.121 GBP (~$124.26 USD, Price/3Q15 Book Value=1.234, which I correctly predicted was below 1.2x year-end BVPS). I only did this because HLMA was pretty highly priced at the same time that BRK.B was at by buy threshold. Halma offered the potential for some gains but perhaps 50% or more declines, while BRK.B was probably close to its price floor.

I also bought more BRK.B from cash in my wife's new portfolio later that month at around the same price.

Although Halma continued to rise, Berkshire did too, so Halma occasionally took a lead of as much as 4 or 5%, and although Brexit boosted Halma's foreign earnings expressed in GBP, Berkshire has now gone 33% ahead of HLMA (less about 1% for HLMA dividends) with a gain of 49% expressed in GBP or 29% in USD. Berkshire had been about 90% of our total portfolio at the time I made these trades.

 

Type 3, Example 2: I sold some Agilent (A) shares from an old employee scheme at $41.64 with no tax hit to move the proceeds into my tax-sheltered account. I bought Wells Fargo (WFC) at $47.72 once the proceeds were in my account. WFC rose a little but languished for a while while Agilent surged ahead to even higher multiples. Agilent is now only about 7% above my sale price, while WFC is 15% above my buy price, so I'm 8% ahead plus a little more for higher dividend yield on WFC. I dare say this could reverse as markets gyrate. WFC is only about a 5% position although BRK's look-through holding raises that to 9%. I'm not sure I understand Agilent's value well enough to continue to hold it, whereas I'm more confident of WFC's.

 

Type 3, Example 3: I reduced my Berkshire Hathaway (BRK.B) at $142.00 (still relatively cheap) to take a 25% position in Apple (AAPL) at $95.00 (which I felt was significantly more discounted than BRK.B was, with potential for a 1-2 year rapid upside and otherwise probably capable of earning me a fair annualized return from the buy price in the long term thanks to dividends and buybacks even without any revenue growth).

I'd feel quite uneasy if AAPL grew to become 40 or 50% of my portfolio given I have only moderate certainty in its long term prospects and predictability compared to BRK.B (where I'd happily hold 100%), so I'd look to reduce my holding substantially if it were to hit $170-$200 per share in the next couple of years or at lower prices if I could trade for something as good but much cheaper. AAPL is up 15% and BRK.B is up 13% since then, though this has varied a great deal, most often in Apple's favor. At time of purchase I also listed a few warning signs that would be sell signals for AAPL almost regardless of stock price, such as losing its premium pricing in phones thereby devaluing the brand, or allowing another manufacturer's phones to run iOS, so they could lead to a Type 1 sale if they occur.

 

I should point out that Example 1 is boosted by my getting out of GBP before Brexit, something I cannot repeat and did not predict. In fact my entire portfolio was in USD at the time, so I truly lucked out this year and preserved my purchasing power as if the pound were still as strong! I do think this will bear out as objectively a sensible trade in the long run, even 5 or 10 years out, and even discounting currency effects.

 

Examples 2 and 3 are still so close that it's very unclear whether or not I made the right choice, objectively. These purchases do diversify my portfolio a little, increase its perceived intrinsic value in my mind, and put a higher floor on my portfolio's low-end value (again in my mind, and completely untested) but it's not clear-cut from the market prices that my choice will look better in months or years time.

 

All these trades averaged commissions below 0.1% and were tax-free (except for US witholding tax on dividends), but I may have been very wrong in my appraisal and have made a mistake in the long term.

 

I think I'm fairly confident in Example 2, but Example 3 is probably a smaller difference in my perceived intrinsic value between BRK and AAPL than the other two examples where the one I sold was more obviously quite richly valued while the one I bought was quite obviously fairly cheap, and I was probably more persuaded by the potential rapid upside in AAPL if iPhone 7 or iPhone 8 or even a surprise product should become a roaring success and lead to expansion of both EPS and P/E, than by a no-growth appraisal where buybacks and dividends provide a more modest per share growth.

 

One way I have that I could benchmark my portfolio performance is against the number of BRK.B I could own with its total value at any time. If this goes up over long periods, I might deem my trading to be a successful addition to my buy-and-hold discipline. I believe this has gone up significantly over the past year beyond the extra sums we've invested, but one year with a handful of trades is not enough to prove I can sustain it long term. The beauty of BRK.B as a yardstick for me is that it has no dividend payout to complicate things and is a stock I'm happy to hold my entire portfolio in for the long term.

[DooDiligence]

I sell when:

 

1) I find a better risk / reward (most of what I sold this year went into real estate.)

 

2) I need the money (no sales for #2 yet.)

 

3) The business no longer looks attractive to me or I discover that I don't understand it as well as I should (sold Polaris because I think competitors are getting much better while Polaris gets worse.)

[scorpioncapital]

I sell stocks that have losses and add to stocks that have gains, pretty much indefinitely...

but I will give it some time since a) I wouldn't own anything if I didn't like the business to a good degree and b) I bought at a price I thought was reasonable...so I'll wait 6 months to a year. If it drops more than 20%, I'll sell regardless of time but only because my portfolio requires less draw-down than others due to some leverage.

 

 

 

[dyow]

You sell when your stock gets near instrinsic value....and you can't use the intrinsic value you used when you initially purchased the stock.  You have to put the intrinsic value into context depending on any changes in the company, industry cycles, interest rates, the general economy etc.

 

You sell when you get to intrinsic value because you have to stick to your process.  You can't pick tops. It's all about the process.  If you stray from the process, you will stray again, and again, and slowly but surely you will become a speculator.  Some speculation is OK, but speculating when you think you are investing is how you lose your life savings.

 

that said, if you have a big unrealized gain in a stock, and you think it is close to intrinsic value but are scared it will go higher after you sell you can sell the stock, and move into LEAPS (if there are any).  That way you lock in gains and can put a portion of those gains into LEAPS for peace of mind.  This works best if you made huge gains on the stock and are able to buy the LEAPS at a reasonable cost with a strike somewhere around the price you sold it at.

 

 

[flesh]

After spending a lot of time frustrated but learning from my experience selling TSE, NC, PCLN, and RLGT early (very early in some cases) I've come up with the following heuristics. In order for me to remember something every time, I must have rules. I know I don't have the will power to do the right thing in every moment but I do have the will power to remember some simple systems/checklists.

 

1. I can't sell more than 1/3 position per day.

 

2. I can't sell 1/3 position until I've spent at least 2 hours updating the story/thoughts/valuation, In order to sell out of a position totally I'll have spent 6 hours spread across at least two weeks.

 

3. I can't sell more than 2/3 of a position in one week.

 

4. I have to hold for at least 1 year.

 

5. The only exception to rules 1-4 is if the thesis has clearly changed.

 

Basically, this controls for emotional spikes, neuroses, and laziness. It forces you to think nearly as critically when you sell as you do when you buy. Over time, it forces you to feel potential future pain of making a buy decision without thinking critically. You can't take the easy way out. In the short period of time I've implemented this it's benefits have become obvious. Try it if you don't do something similar already.

 

It's easy to remember regardless of the circumstances and is a realistic approach.

 

-Cheers and thanks for the input.

 

 

[scorpioncapital]

Don't know how conventional this is, but recently I've been ordering investments according to internal investments and deals made. If no deal or major investment is made, I order the operating business according to pricing power and growth in volumes. Lots of companies are making deals, especially big ones, so you can track what is the return on a few years of investment. This should be a leading indicator of returns over the mid-term. If investment of some sort, tangible or intangible, drives growth, than the quality and details of this investment is a variable you can use to position size according to your tastes.

[Whensthepaintdry?]

On 12/6/2016 at 1:19 PM, Dynamic said:

 

Type 3, Example 3: I reduced my Berkshire Hathaway (BRK.B) at $142.00 (still relatively cheap) to take a 25% position in Apple (AAPL) at $95.00 (which I felt was significantly more discounted than BRK.B was, with potential for a 1-2 year rapid upside and otherwise probably capable of earning me a fair annualized return from the buy price in the long term thanks to dividends and buybacks even without any revenue growth).

This was a great move! Funny I find myself thinking about doing the opposite now. 

[Whensthepaintdry?]

Sorry to reply on such an old thread, but I have urges to sell some things and make some reallocations in my accounts and @John Hjorth suggested I read some of @Dynamicposts. 

this one was great and will probably lead me to try and ignore some feelings that I’m having right now or until actual meaningful opportunities present themselves. 

[longlake95]

Sell slower than you buy. 

[Dynamic]

I don't know what types of companies you're thinking of selling @Whensthepaintdry? but my inclination if they are fairly reliable compounders is to try to project normalized earnings in about 5 years, say 2028 or 2029 and see if the price multiple is a bit more reasonable.

 

That might give you a better handle on whether the current price is plausibly correct. With something like Nvidia that seems to have been bid up on AI mania, the Price to 5th year earnings ratio (or its inverse, the 5th year earnings yield) might still look enormously overvalued, indicating that it could be time to sell for overvaluation alone as it would have to shoot the lights out for a decade or two to provide you with even a modest return from today's price.

 

With something trading at 30-40x current earnings but a truly reliable 14% CAGR, earnings would have doubled in 5 years, giving a 15-20x multiple in 5th year earnings, i.e. a 5.0-6.7% 5th year earnings yield which doesn't sound so outlandish, especially if it's still likely to be valued at a high current multiple having achieved that growth rate Even if the current earnings multiple in year 5 declined by a fifth to 24-32x (from 30-40x), you'd still achieve 10% CAGR on your investment, which would be a decent result.

 

To my mind, the Margin of Safety concept applied in both directions, provides what engineers call Hysteresis. This can apply to a thermostatic switch turning on a water heater when the temperature drops, say 2 degrees below the set point then turning it off at the set temperature. With only 0.2 degrees of hysteresis, you'd wear out the switch mechanism by constantly turning it on and off. I'm investing terms, having a larger range of Price to Intrinsic Value between buy and sell price means you rarely incur frictional costs like taxes or end up out of the position and interrupting your compounding, which long term has more to do with the underlying business performance of a great business than with your buy and sell prices.

 

I have had times when moving accounts between providers or taxable and non taxable accounts has caused me to sell at lower prices than I otherwise might. My Apple sale in 2018 for 110% gain in 2 years was one such, partly sold to take advantage of an opportunity I couldn't do within the account where I held it. Since that sale Apple has achieved about 32% CAGR so I had to do very well to beat the effect it would have had on my overall portfolio if I'd retained the 35-40% position Apple had then grown to. I think I had a good deal of luck in the alternative path I took.

[Whensthepaintdry?]

@Dynamic Thank you for the response. I really like the way you laid that out. I’ll be using this exercise on multiple investments. I’m stressing too much on current valuations and ignoring what those valuations may be in the future based on my earnings projections. What I’m doing sounds silly when I say it out loud . 

[Saluki]

This is one I've always struggled with.  I think value guys (as opposed to growth or GARP or momentum) have the same weakness that you have to train yourself out of. Since you like buying cheap, when it gets to a price where you wouldn't be a buyer, you sell.  I thought a lot about mistakes like buying Hanesbrands on the spinoff from Sara Lee and patting myself on the back because I made like 40% in 6 months.  Then it traded flat for a couple of years and went up 10x from there. 

 

Other than having a sell price in mind when you buy, I think one thing that's helped me sit on my hands recently is asking "is the company getting better or worse?" and if it's the former, I hold on for a while longer. If it's the latter, I ask "is it permanent?" then decide from there.  Temporary: Google (ChatGPT), Facebook (Apple privacy and Metaverse), Permanent: Hanesbrands. With Hanesbrands, back then the company was getting better even if the price didn't move much (fall in cotton prices and growth of athleisure). And the market recognized that. Whereas now it is impaired (getting eaten alive by Gildan which has newer machines, less debt), so it's a time to sell. I'm trying to recognize that pattern in the future.

 

I overpaid for Fairfax after attending my first meeting in 2018 and having rose colored glasses on, and it was underwater for several years, but I didn't sell because I could see it was getting better and for some reason when a stock has a dividend I am much more patient with it than stocks without one. I think stepping back looking at the metrics helps sometimes too, but sometimes the story is not in the numbers.  With FFH, I remember scratching my head when it was selling for 80% of book value (giving the assets or management a negative value) and I saw Prem doing a tender offer and buying shares hand over fist with his own money and I was darn near sure Mr Market was wrong so I just sat tight.

 

With JOE the price went no where, but they were buying back a lot of stock and to me if you buy back 10% of the shares and the price doesn't move, I still feel like I'm up 10%. STNG is another one like that.  They already bought back 10% of the market cap this year and might buy back another 10%.  If the stock doesn't move, I still feel like I'm up 20% on it.  OXY is another one, it's price is the same as it was a year ago buy the enterprise value is $10bln less, so I feel like I'm buying a better company. (Stock price going down, but the company is getting better, so hold.  If something happens and it gets worse permanently, sell). 

[Spekulatius]

Selling right in a way is harder than buying right. I like the concept of hysteresis that @Dynamic laid out nicely. This leads to selling later and in a way gives you a margin of safety against selling too early.

[RedLion]

When I started investing I would always double down, concentrate, grit my teeth and hope to sell off likely too soon once I got back in the black finally. 
 

Over the last several years I’ve been developing a strategy in my taxable account which has actually been outperforming my retirement account even before taking tax into consideration.

 

I really look to sell my losers, preferably with short term losses and then try in most cases to hold onto my winners. I’m not above selling out for a short term loss and then trying to establish another position at a later date. 
 

I think this approach has led or will lead to holding onto some big winners longer. Ideally for multiple years or even decades. 
 

It’s also led me to closely scrutinize losers and try to sell at a short term loss and roll to a comparable investment. 
 

This blew up with META for me recently, but has worked more than it hasn’t. 

[Gregmal]

Yea I definitely concur that you need to let your winners run. 
 

When to sell? Idk but I sell or reduce stuff when I no longer feel comfortable with it. If you are honest with yourself you can really just feel the ground shifting on stuff. The thesis changing. Fundamentals deteriorating.
 

An important distinction is secular versus cyclical. If I like something long term secular I care less about the cyclical. But if I’m playing with a secularly challenged or just plain old shitty biz, you want to be decisive. Big reason I got out of GM years ago. 

 

So I guess much of this also helps having a catalyst. REITs out of COVID had the sunbelt wave and then with a lag the widespread recovery where even the shitty blue state stuff recovered. Once that played out there’s much less reason to hang around unless you have an AIV or VRE type catalyst. VRE to me it seemed lost its catalyst when they refused to entertain selling in a good environment. So I sold. 

Edited June 22, 2023 by Gregmal

[Whensthepaintdry?]

I’m loving all the responses here. When I invest with some sort of catalyst in mind selling is much easier almost automatic. selling “compounders”  though is tough. Apple and MSFT for example. When I do the math backwards from a 5y 10 percent cagr multiples need to stay elevated with eps growth rates of 10 percent plus. Part of me says their great companies with optionality let it ride and who cares if I get 5 percent or maybe no returns for 5 years. I don’t need the money and I’m not capital restraint yet to add to other investments. Or maybe I’m just being naive. 

[Gregmal]

7 minutes ago, Whensthepaintdry? said:

I’m loving all the responses here. When I invest with some sort of catalyst in mind selling is much easier almost automatic. selling “compounders”  though is tough. Apple and MSFT for example. When I do the math backwards from a 5y 10 percent cagr multiples need to stay elevated with eps growth rates of 10 percent plus. Part of me says their great companies with optionality let it ride and who cares if I get 5 percent or maybe no returns for 5 years. I don’t need the money and I’m not capital restraint yet to add to other investments. Or maybe I’m just being naive. 

Yea as long as you can get reasonably comfortable with the likelihood of the investment exceeding the cost of putting it on, IE your access to capital, then it’s easy. IE if you can borrow at 6% and expect the investment to do 8-10%….I almost never worry about stuff like “beating the market” or whatever. You look to take shots you know you can make. The results tend to take care of themself.