Australian stocks have put in four weeks of hard yakka. Company share prices hit a two-month high after Melbourne Cup Day — now they’re taking a breather.
Stocks around the world have had a jarring ride this year. After a choppy start to 2014, it took seven months for the Aussie benchmark S&P/ASX 200 [ASX:XJO] index to put on 10% — then in five weeks from the start of September, investors lost almost all those gains.
So after a strong month, we can understand your desire to take money off the table.
But before you dump all your stocks — stop for a moment. Here are a few tips that will save you money.
Selling is the hardest thing to do well as an investor.
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When you own a stock, you’re navigating a treacherous corridor between fear and greed, between risk and reward. When you sell that stock, you exit that corridor — for better or worse.
We don’t think anybody navigates that corridor well consistently. That includes the whole slew of investing ‘greats’ that inspire hero worship among small-time investors.
People mythologise billionaire fund managers like Warren Buffett and Carl Icahn. If you’d believe their press, these guys can do no wrong.
Well, they do get it wrong. Quite frequently. You just don’t hear about it when they make a blunder.
Billionaires are subject to the same emotions as us mere mortals. For the most part, they like to trumpet their successes, and they’d prefer to downplay their failings.
Everyone has sold a stock only to see it rise higher. And everyone has held onto a stock longer than they should have, giving up big potential gains. Buffett and Icahn cop those whacks with the rest of us.
But there’s another reason why you don’t hear so much about big investors’ losses…
Tend the garden
Rich investors get richer by selling stocks — be they winners or losers — quickly and cleanly. They don’t expect to get it right 100% of the time.
But they monitor their portfolios vigilantly to minimise the risk of any one position destroying their overall wealth.
Our old pal Vern Gowdie came up with a handy analogy for this behaviour. Vern has spent decades advising Aussies on financial health. He’s a wealth of knowledge when it comes to selling stocks.
Vern says:
‘Most people sell their winners and retain their losers. It’s the psychology of realising a loss that seems to prevent people from acting the other way around. If you had a garden, would you pull out the roses and keep the weeds? Of course not. The same goes with your portfolio. Don’t be afraid to cut your losses…you must continually ‘tend the garden’; otherwise, the roses could be overrun by weeds.’
Vern’s describing the kind of active approach where you let your winners run and dump the losers.
It sounds simple in theory. And if you set ‘stop losses’ at sensible percentage intervals, you can dodge most of the landmines.
But here’s the key point that might be less obvious…
A simple reason to sell
It matters little what the broad stock market is doing.
If you were sitting an exam, you wouldn’t drop your pencil after half an hour just because the student at the next desk has finished.
In the same way, your decision to buy or sell stocks shouldn’t rest on whether an index has ticked up or down by a few percentage points. It should rest on whether the stocks you’ve picked for your portfolio are still undervalued.
Of course, one man’s value is another man’s overbought ‘bubble’ stock. But here’s how you can think about value without fretting over price-earnings ratios and earnings per share forecasts.
It’s as simple as this: sell when your reason for owning the stock is no longer true.
This is our favourite reason to sell any stock. Never lose sight of the reasons why you bought in. When your main reason for owning the stock vanishes, it’s often a smart time to go.
For example, if you bought a stock because it had a great balance sheet, and it does a deal that weakens the balance sheet, it could be time to go. If you bought a stock because you identified a big gap between the share price and the value of its assets, and that gap closes — then it’s time to think about selling.
The biggest risk is getting complacent about your stocks. When the market offers you a great price to sell, you should be willing to think about reducing your position. But as long as valuations remain reasonable, you might hold a stock indefinitely as the share price and the value of the business grow together over time.
There is no magic formula to sell to ensure maximum gains every time. But if you run your own race and focus more on the stories behind your stocks than on the daily gyrations of the overall market, you’ll give yourself the best chance to fatten your portfolio.
Cheers,
Tim Dohrmann,
Editor, Money Morning
The post The Art of Selling Well As An Investor appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
