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When To Sell:

Steve writes,

I’ve seen the light for quite some time now (I think), but I’m not ready for anything else besides the index. I’m stuck in limbo. I know where the real growth strategies are at. Why would I own the index when I can own the company myself? Again, I’m not ready and we both know that. For my peace of mind, I’ll stick with the index and hope for the best. In a few years time I hope to look back and laugh at myself wishing I would have entered sooner.

I guess the major issue I would have, and most investors, would be when to sell. You never know when to, or if you should ever. This buy and hold strategy seems cumbersome because you just never know. Emotions seems to be the victim, but I believe that’s when you create a capital gain %, and once you reach that goal you cash out. Afterwards you should re-organize and start all over and wait for prime buying opportunity if it comes available again – essentially what I see you doing.

When to sell…

This is a really tough question to answer and I think it depends entirely on the individual investor. You need a plan, the patience to see it through and the discipline to maintain it. You need the strength to resist emotion and have confidence in your ability to do so. For each investor when to sell an investment is an independent decision that you are responsible for making. Everyone knows that it’s easy to buy, but difficult to sell and the why is what eludes many. I ‘ve always thought that it comes down to simple expectations.

When you invest you expect to make money. When you start to lose money there’s always hope that things will turn around and you maintain your expectation of making money. Only when it’s too late (you lose it all or simply give up) does the frustration and doubt begin to eat away at an investor.

There is always one simple truth about investing: You will lose money.

You will miss an opportunity to buy, you will hold off on selling until an opportune time has passed and you will lose some of what you’ve invested. The key for any investor is to understand that investing is an art of hitting the long ball. No baseball player can hit the ball successfully every at bat; that is a simple fact of the sport. What a player does when they show up every day at the park is give themselves the best opportunity to be successful through consistency. It’s not the homeruns that investors should be aiming for but the consistency exhibited by so many baseball greats that hit over 3000 hits in their career. They didn’t have half of the homeruns of other players, but batted consistently above .300 throughout their entire careers. This is how you approach buying, holding and selling when you invest. You’re not going to get a hit every time maximizing on your opportunities becomes your key focus.

When I sell an investment is fairly simple:

  1. If I make a 30-50% gain in a short period of time, regardless of fundamentals, I take some off of the table. The stock might rocket up another 40% or might plummet to zero but regardless of what happens I never know for sure. Although I may have maximum confidence in my research I know that how the market perceives an investment isn’t necessarily always the same as my perceptions. By locking in a gain when I have the opportunity I give myself a number of options. I can always buy it back later at a higher or lower price, but I only ever make money when I sell.
  2. If on any investment I’ve lost 40% of the original value I sell, take a tax-loss if I can and remind myself that I can always look to re-enter the stock later while protecting the remainder of my investment. Then I study the investment and learn from my mistake.
  3. If fundamentals change to the downside or deteriorate I’m out. If a company decides to compete on price, diversify into a non-core business or management begins to lose control I’ll sell without hesitation.
  4. If I realize I’ve made a mistake in my analysis or chose a stock for the wrong reasons.
  5. When an investment has hit my fair value or sell target. When I buy a stock I have a fair market value (FMV) in mind and I like to buy an investment at a discount to this. This could be based on book value, net asset value or a discounted cashflow model. For many of my core holdings I have confidence that I’ll never sell them until retirement and look to add to them on weakness or when I need to re-balance. For non-core holdings (1-5 year hold) I will sell when I perceive them to be fully valued.

This is one important thing I want to address. You don’t need to buy at one moment, sell everything and then await the next opportunity in the markets. Cash is king for an investor because it gives you the opportunity to take advantage of situations in the market that you might not otherwise have if fully invested. Holding a minimum of 5% cash in a portfolio is likely a prudent decision based on this principle. I see a big difference between market timing and taking advantage of opportunities. Market timing, in my view, is making an assumption about where a stock may go over the short-term based on market movements. Taking advantage of an opportunity when a stock is miss priced in my favour is a sound investing fundamental.

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