One of the hardest aspects I find in investing is not searching for value stock ideas, analyzing businesses or even calculating intrinsic value. I find selling to be one of the hardest and something I am terrible at, which explains why this post is only the second I’ve ever written on the subject.
Mostly because I’ve only ever been long in any investment position and partly because I’m a greedy human being.
Basics of When to Sell Stock
You would have already heard the basics to selling stocks (including this blog). The basics to selling is:
- selling once it reaches fair intrinsic value
- acknowledging a mistake in the original thesis
- change in company fundamentals
- better stock idea or any other investment opportunity comes along
- in an emergency
It is Difficult Selling Stocks
The problem is that on far too many occasions, I haven’t sold. My greed caused me to try and pick up pennies in front of a bulldozer. Sometimes, I get away with it but once in a while I’m run over and it hurts. This is precisely what happened with my EMAG arbitrage.
Although I was confident that the deal would go through, other completely out of control external factors caused the merger to blow up and my position with it. Just one day before the deadline, I was risking my 50% return (big position at the time) for a few pennies.
But I look back at the situation, recall how I felt after seeing my portfolio drop by 30%, re-read what I wrote and it is enlightening. It helps in reminding me of the lack of discipline and objectiveness.
Learning from Mistakes
With good mid to long term companies that I own, although it reached fair value, I did not sell because I was content with the business operations. This has now become an outdated reason for my continuing to hold.
No matter how good the company, I now prefer to sell once it reaches fair value.
Back when I first purchased KTII and ATW, I was fortunate enough to see the price reach my fair value target within a few months. I held on hoping for it to continue its upward trend. Then the market turned and rather than being cashed out and having a cash balance for new opportunities, these positions dropped like everything else.
This is an example of how holding cash for the next opportunity isn’t so bad.
Selling for Better Opportunities
For someone that goes through quite a number of stocks, I never fully understood how I could go about selling a position each time a better one came along.
If I bought a company one week and next week I come across another equally if not better opportunity, I would have to sell according to the basic rule. But what happens if this occurs every week?
Just like how there will always be someone smarter than you, there is a stock that will always be better than yours.
Selling Losing Positions
When selling losing positions, there are 2 groups of people.
- A group that waits for the stock to recover so that they do not incur a loss, even if it takes several years to recover
- Sell even though the return is down 50% because of a new 100+% potential idea
Which would you choose? Most people would say they are number 2 but the majority is in group 1.
I’ve now moved from group 1 to group 2. e.g. Although I like KSWS with its strong balance sheet and experienced management, I sold it and invested in two other positions that have both yielded 20% and 50%.
Mechanical Selling and Trailing Stops
One idea I have been pondering is entering a sell order after my purchase at my fair value. That way if the stock was to run up, it would sell automatically without my intervention.
Other people also swear by the use of trailing stops in protecting gains.
When Should I Sell?
Still asking this question? It may be a hint that you should sell now. Without conviction, there is no reason to be holding.
I hold KTII and ATW at the time of writing