At the beginning of the week a reader posted a question about how I decide what to sell . I specifically wanted to answer this and am now getting to it.
The answer is not that simple because there are several reasons why I would sell a stock and any of them could come into play at any time.
The stock I sold at the beginning of the week was sold for a couple of reasons. First I am shifting, so it looks based on the trading in the market, to a more defensive posture. The name I sold was a higher beta name I added last fall. I will look to sell a couple others here very quickly. Another reason why I sold that stock in particular is that I got something wrong in the process. To me there is clear an obvious demand for the product along with a catalyst for growth yet the stock had fallen much more than its sector and the broad market. I could spend some time trying to figure out what went wrong but that wouldn't change the fact that I was wrong about that one.
As I often write, that goes with the territory. I have a couple of other that I have been flat out wrong about too. There are a couple more where I have not been wrong per se but that are candidates for a sale as I get more defensive. For example clients own a high beta industrial name that I expected to move more than the sector. In the last month the sector is down about 6% and the one stock is down about 16% with no story changing news. Or maybe I was wrong about that too.
Not too ago I wrote about my process for getting stopped out of a high beta oil stock. It had a great run, well ahead of the group and oil had moved to high. It seemed like a good point to reduce exposure. That was more of a gut call.
At some point conditions will be favorable for tech again. At that point I would have to sell a couple of the defensive names I may be adding now.
There is probably no exact answer to the question but that should give some idea. Keep in mind that most clients own 40 stocks or so. As is always the case some are working better than others. That's just how it goes.
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1 comments:
Roger,
I guess I am on a roll here...I hope you don't mind. But selling a stock is such an important thing.
My philosophy is still pretty zen-like. That is, my action regarding a stock in my portfolio is really devoid of any of my thoughts or thinking. Sounds dangerous?
What I mean, is that just like buying a stock, by monitoring the stock price itself, and then screening for fundamental information, I generally sell a stock based on what the stock price does.
How does that work? Well, for me, I believe in stopping out of stocks quickly when they are first purchased. That is, borrowing from William O'Neill, in the CANSLIM technique, I sell a stock at an 8% loss after I first purchase. I don't care what I think about the future prospects of that stock. I believe there are LOADS of great stock possibilities, and every single stock in my portfolio is dispensable.
Second, again borrowing from O'Neill, if I have sold a portion of my stock at a gain (I believe he uses just the idea that the stock has had a nice appreciation in price previously), I sell at break-even. Thereafter, I allow a stock to retrace to 50% of my highest sell-point.
Third, I sell quickly, as I said on bad fundamental news (that is my one exception!)..or poor price performance. But I also believe in selling winning stocks slowly.
It is the combination of sellilng losers quickly and winners slowly that will lead to a profitable portfolio imho.
What do I mean by selling winners slowly? In practice, as I write on my blog, Stock Picks Bob's Advice, I have sale targets at 30%, 60%, 90%, 120%, then by 60%....180%, etc....where I sell 1/4 of my position. I think of this as my sort of casino-visiting strategy (that I never have the discipline to follow), where you have a pile of quarters in one pocket, and put all of your winnings in the other :).
That is when a stock appreciates by 1/3, I then have 4/3 of that investment. Selling 1/4 of my position at each of those points, returns my investment "whole".
That is a lot of verbiage, and does imply a fairly aggressive trading and monitoring process.
But I believe I have built a winnning portfolio through this technique.
Thanks again for the opportunity of sharing some of my amateur thoughts with you here on your blog!
Bob
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