Introduction
Decisions on whether to hold or to sell are rarely easy, and often there are no "right" answers. Everyone makes mistakes. Those who are wise learn from their mistakes.
Both individuals and clubs face the question of whether to sell or to hold stocks numerous times during their years of investing. If stocks are carefully selected, sell decisions are apt to be less serious and less frequent.
Although NAIC investors adhere to a buy-and-hold philosophy, they should not buy stocks and forget them. Over time, the management, industry, political climate, or economy can change. Sometimes, an original SSG may have included overly optimistic judgment. In either case, the original SSG needs to be adjusted.
The companies mentioned in this presentation are for illustration purposes only. Mention of a company should not be construed as a recommendation for selling or holding its stock.
Your participation in this workshop is welcome and will add to everyone's understanding. Click the Reply button at the bottom of this message to reply to this message.
(To be continued)
Nancy CraysNAIC Forum - Long term investing made simpleClick on the Forum name to visit us
Overview of Workshop
I'll be covering the following topics:
"The selling is often a harder decision than buying. "
I am really looking forward to this discussion. My portfolio is seriously in need of weeding, but I have the worst time making up my mind what to do. I have hit bottom with several of my stocks and am now trying to decide on whether or not to take my losses and invest in something better. I am a terrible procrastinator. Hope this discussion gives me the motivation to make some good decisions about what to do.
Marcy Fragomeli
First, we'll deal with when to sell. This will take a few days to cover.
Arguably, the most important reason for selling is because you need cash for retirement, college education, or other life events. You will still need to choose which stock or stocks to sell.
1. You could sell a stock that will improve your portfolio’s diversification. You may want to sell some of the shares of a stock whose value exceeds the percentage of your portfolio that you set for it. For example, if one stock out of your portfolio of 15 comprises 20% of the value of your holdings, you may want to sell some of its shares.
2. You could maximize your potential return by selling those stocks with lowest potential total return. (1) Be sure your SSGs and PERTs are updated. Sort your portfolio on projected total return. (Click on the thumbnail projtr.ppt below to open up an example. You will need PowerPoint or the PowerPoint viewer to view this attachment.) Remember some of those stocks with potentially lower returns may be your least risky stocks.
3. You could sell a stock that will improve the quality of your portfolio. For example, consider selling stocks with erratic sales and EPS growth as shown in Section 1 of the SSG. (Click on quality.ppt.)
Comments and questions are welcome.
I too thank you for presenting this workshop. Our club struggles with the "when to sell" decision. It will be good to take part in discussion on the subject.
Karen OBoyle
Nancy
Thanks for taking on this most difficult and most important aspect of managing one's portfolio.
Having to sell stocks at the wrong time to me is a risk to try to avoid. Emergencies do arise but many like the one's you mention are known well in advance. I see it important everyone have an emergency cash fund or readily available cash like money market funds available. This should help avoid having to sell stocks in a hurry that can often mean at a low price.
I know the title of this class is When to Sell, but in this case I see a more appropriate wording would be to REPLACE a stock that has become too high a percentage of a portfolio with one of equal or better quality having a significantly higher expected total return. I prefer at least 15% ETR and always at least 50% higher than the stock being replaced. Timing the market is rarely successful and thus one should stay fully invested. NAIC Principle #2.
You are really getting fancy. (g) Did you use Snagit to prepare the split view (projtr.PPT) with the jagged edges? If so care to share how you were able to do this?
I see that steps 2 and 3 need to be done in reverse order. Step 3 is part of one's Defensive Portfolio mgmt. When a stock's fundamentals have deteriorated and thus it quality has been reduced it needs to be removed from the portfolio. Often stocks with deteriorating fundamentals will indicate superb results on the SSG backside and specifically the estimated total return. Thus before embarking on an effort to sell the lower total return stocks I see it important to first weed out the poorer quality stocks to see what the portfolio looks like without them. I see selling stocks with low ETR's is part of the Offensive Portfolio management and can be done on a rather leisurely pace since these are usually very good high quality stocks only to be sold when their price is grossly over valued.
One thing I have learned is there are many differing views within NAIC how this area should best be handled. I tend to listen to the old masters like Ellis, Ralph and George Nicholson along with tidbits from the youngsters like Mark, Brian Lewis, Jim Thomas and Gary Simms. I find none agree on everything and I like to pick the best ideas of each (in my view) and benefit from their experiences. You can learn a lot by observing their approaches. Likewise I know all will not agree with my thoughts.
Thanks again for this most important topic to discuss.
Dan
" Having to sell stocks at the wrong time to me is a risk to try to avoid. Emergencies do arise but many like the one's you mention are known well in advance. I see it important everyone have an emergency cash fund or readily available cash like money market funds available. This should help avoid having to sell stocks in a hurry that can often mean at a low price."
"I know the title of this class is When to Sell, but in this case I see a more appropriate wording would be to REPLACE a stock that has become too high a percentage of a portfolio with one of equal or better quality having a significantly higher expected total return. I prefer at least 15% ETR and always at least 50% higher than the stock being replaced. Timing the market is rarely successful and thus one should stay fully invested. NAIC Principle #2"
" You are really getting fancy. (g) Did you use Snagit to prepare the split view (projtr.PPT) with the jagged edges? If so care to share how you were able to do this?"
"I see that steps 2 and 3 need to be done in reverse order. Step 3 is part of one's Defensive Portfolio mgmt. When a stock's fundamentals have deteriorated and thus it quality has been reduced it needs to be removed from the portfolio. "
" One thing I have learned is there are many differing views within NAIC how this area should best be handled. I tend to listen to the old masters like Ellis, Ralph and George Nicholson along with tidbits from the youngsters like Mark, Brian Lewis, Jim Thomas and Gary Simms. I find none agree on everything and I like to pick the best ideas of each (in my view) and benefit from their experiences. You can learn a lot by observing their approaches. Likewise I know all will not agree with my thoughts."
Yes, there are differing views, and I think what suits one may not suit others. I think each of us has to use the approach that fits our personal situations, knowledge, talents, and so on. If one method fit all, we could have one presentation by one person and be done with it.
Thanks for contributing your thoughts, Dan.
Dan, Nancy, Others........
>>I see it important to first weed out the poorer quality stocks to see what the portfolio looks like without them. <<
For me this is the toughest job of all....deciding whether the poor quality that shows up on the PERT-A is potentially reversible. I try to follow the companies in my portfolio rather closely. When I lose confidence in management, I'm out of there. But when I do have confidence in a company's management team, having gained that confidence over an extended period of time, I find it very difficult to jump ship. I don't know at this point whether that's a good thing or a bad thing. I won't purchase a company with declining fundamentals regardless of the reasons. But when I have owned and followed a company for a long time, I tend to hang in through challenging times.
Nancy IsaacsNAIC Forum - Long term investing made simple(Click on the Forum name to visit us)
I like Cy Lynch's CF '99 presentation on Portfolio Management.
He uses the following analogy.
Planting
Feeding
Weeding
Prunning
This describes the buy/sell decisions of a club/individual.
Initially, they have to research, select and buy a stock. Planting
Then they have to monitor those stocks for fundamental problems. Feeding
Sell the fundamentally troubled stocks. Weeding
And trim back on their grossly overvalued stocks. Prunning.
In offensive selling I really like the TK requirement of eps dropping below 12% (p 164 of TK 5 manual). before the "sell/replace" signal is generated.
Last week on i-c-l a fellow ask about UHS. I use dTK 5, OPS data, opened the file, and used shift-alt-y to look at the last six quarterly results. I easily saw the decline in ptp and eps and that sales was doing OK. Since the ptp was diverging from sales I also know ptp profit margin was goin down. All of this without ever opening PERT.
I'm beginning to think Rich is right. :-)
I like Ellis' definition of quality. Quality = growth + efficiency. We monitor historical growth and efficiency on the SSG. Once established, PM is simply monitoring this quality on a quarterly basis. You can do this by several different methods.SSG & ttm data, PERT Report, PERT A, PERT A graph, TK 5 defense report.
Gary
Gary,
>>Then they have to monitor those stocks for fundamental problems. Feeding
Sell the fundamentally troubled stocks. Weeding<<
What's Cy up to these days? I used to love his contributions to the i-club-list but haven't heard from him in a long time.
I took "feeding" to mean adding to existing positions, and I took "weeding" to involve all defensive considerations.
I haven't talked to Cy in a long time so i don't know what he is up to.
I could be mistaken since it was 1999 since I heard it. vbg
Cy departed NAIC some time ago. I am not sure why. He did provide some superb advice on the NAIC methodology.
He must be smiling since the Atlanta Braves made it 13 consecutive division titles this year.
"This is one I have a lot of trouble doing. It seems that by the time quality problems show up on PERT the stock has dropped significantly and it seems to be too late and too foolish to sell because it once again looks like a good buy. Besides, in spite of what everyone counsels, I find it hard to sell a stock that has dropped significantly off its high. That doesn't mean I don't do it -- it just means its hard to do. "
Remember, we're talking about a person who needs to raise cash. This person has to sell something. Let's say the portofolio is well diversified and there weren't any stocks with significantly lower estimated total returns. Then the investor could look at quality.
The hardest decision would be when they were all of high quality, none had low estimated total returns, and diversification was not an issue.
We'll start looking at those who don't need cash tomorrow.
"If I need cash, I am much more likely to sell a stock that has a low ETR than sell one that has potential to come back. "
I looked at the historic quality of the stocks with the SSG. OCA and Coherent stand out to me as stocks that should have been sold before now and replaced with other stocks.
I think one problem we are going to run into with OPS and its enabling the use of the PM tools is many portfolios have not been managed before and they should be looked at first with the SSG for the ideal of monotonous growth.
Those that don't have this "quality" should be candidates to be sold.
Once you have a portfolio of monotonous growers I think the PERT tools will work much better.
" I looked at the historic quality of the stocks with the SSG. OCA and Coherent stand out to me as stocks that should have been sold before now and replaced with other stocks."
