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Sell Discipline


zarley
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This morning I sold the last half of a position I had in Timberland (TBL) at $36.44.  I bought a year and a half ago at ~$13, thought it was worth about $20, sold half not long ago at $30.  I'm ambivalent about it because I like the company and would have liked to hold it longer.  But, It is near an all-time high and I've been planning on getting more defensive by raising cash, plus I wanted to add a little to some other positions that look reasonably cheap (cutting the flowers and watering the weeds perhaps). 

 

Obvious alternatives to selling would probably be buying a put, maybe a couple bucks below the current price, or just putting in a stop-loss order. 

 

How do you guys approach sell prices and taking profits?

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Klarman has an excellent chapter 13 in Margin of Safety on managing a portfolio.  Here's a teaser...

Second, the periodic liquidation of parts of a portfolio has

a cathartic effect. For the many investors who prefer to remain

fully invested at all times, it is easy to become complacent, sink-

ing or swimming with current holdings. "Dead wood" can

accumulate and be neglected while losses build. By contrast,

when the securities in a portfolio frequently tum into cash, the

investor is constantly challenged to put that cash to work, seek-

ing out the best values available.

...

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.

 

 

This morning I sold the last half of a position I had in Timberland (TBL) at $36.44.  I bought a year and a half ago at ~$13, thought it was worth about $20, sold half not long ago at $30.  I'm ambivalent about it because I like the company and would have liked to hold it longer.  But, It is near an all-time high and I've been planning on getting more defensive by raising cash, plus I wanted to add a little to some other positions that look reasonably cheap (cutting the flowers and watering the weeds perhaps). 

 

Obvious alternatives to selling would probably be buying a put, maybe a couple bucks below the current price, or just putting in a stop-loss order. 

 

How do you guys approach sell prices and taking profits?

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at worse you left some profit for the next guy.  Turn around and find something else that sells for $0.20 or $0.50, rinse and repeat.

 

Yeah, that's the idea.  But, the portfolio management/trading part of the sell decision is not something I've thought very hard about.  My approach has really been about as simple as it can be, so I'm hoping to broaden my thinking about that.

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Klarman has an excellent chapter 13 in Margin of Safety on managing a portfolio.  Here's a teaser...

Second, the periodic liquidation of parts of a portfolio has

a cathartic effect. For the many investors who prefer to remain

fully invested at all times, it is easy to become complacent, sink-

ing or swimming with current holdings. "Dead wood" can

accumulate and be neglected while losses build. By contrast,

when the securities in a portfolio frequently tum into cash, the

investor is constantly challenged to put that cash to work, seek-

ing out the best values available.

...

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.

 

I'll need to find the .pdf I have of MoS and take a look at that.  Thanks for the suggestion.

 

My thinking has generally been in line with your excerpt.  At the end of the day the future appreciation for a richly valued stock is potentially quite poor or mediocre even if the business does well (see MSFT over the last 10 years).  So, I'm comfortable with the notion that even if I like the business, if I can't justify the price (would you buy it today?), then selling needs to be strongly considered.  I'm curious about how strategy-wise or tactically, how people approach the problem.

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My thinking has generally been in line with your excerpt.  At the end of the day the future appreciation for a richly valued stock is potentially quite poor or mediocre even if the business does well (see MSFT over the last 10 years).  So, I'm comfortable with the notion that even if I like the business, if I can't justify the price (would you buy it today?), then selling needs to be strongly considered.  I'm curious about how strategy-wise or tactically, how people approach the problem.

 

Well you're correct here.  In particular when it is based on the stock market.  While you should perceive each investment as a partial piece of ownership, the fact remains that the market allows you to exploit inefficiencies in valuation.  You buy something at significantly less than intrinsic value and then sell that as it approaches intrinsic value. 

 

Where you sell is completely based on your level of comfort with the risk involved in holding something as it appreciates.  An individual's own private portfolio would allow them to hold a stock significantly longer, since there are no outside forces demanding their capital back.  A portfolio manager may have to sell earlier, simply because the risk of volatility in the fund could cause an exodus of capital. 

 

Ideally both would be the same, but unfortunately that's not the way it works unless you have captured capital through a corporation, or very long lock-ups.  For any individual, sell based on your comfort level with where the price is relative to intrinsic value.  There is no hard and fast rule.  Cheers!

 

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Thanks guys.  Thinking about this a bit more, I was really getting at portfolio composition, position sizing, scaling in and out of positions, simple hedging, etc.  The timberland sale this morning was just the trigger for thinking about this stuff a bit more.  I had hoped to hear how members of this board work that stuff in to the general framework of buying dollars for 50 cents and selling them for $1.50.  As Parsad notes, as an individual, I don't have many outside considerations to worry about when making these decisions, so I have a little more flexibility to avoid trading if I want to.  And, with a goal of minimizing costs and taxes, I intend to minimize trading as a general rule.  With all that said, the individual decisions are all quite situational and may not be suitable for a more formal or rigid approach.

 

Other than scaling in and out of positions and maybe using defensive options or stop-loss orders, what tactics are members here using to deal with the question of when and how to sell out of a position that has become fully valued or overvalued?

 

With that, I'm off to read Klarman's thoughts.

 

 

 

 

 

 

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just to share ideas, what about buying OTM puts as insurance for a market crash/correction?

 

for example, if you want to "insure" a nearly 100% increase in COP in 18 months (and an effective dividend yield of nearly 7%) you could buy jan 2013 $50 puts @ $2.40, this would buy you some ($50 put is only 2/3 ITM) protection until jan 2013 against capital loss and would protect a 7% dividend yield by sacrificing 3% return (1.5%/year) (maybe i should say sacrificing 6% return i.e. $2.40/$37.50 = cost basis, still only 3% per year)

 

another example, if you want to "insure" a nearly 70% increase in LUK in 18 months, you could buy jan 2012 $25 puts @ $0.90, this would buy you some  ($25 put is only 3/4 ITM) protection until jan 2012 against capital loss by sacrificing 3% return.

 

looks like this is kind of what fairfax is doing, only they use the index to hedge....

 

any observations would be very welcome....

 

regards

rijk

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