When to sell

[Clitheroekid]

This is a perennial problem for me. I can see buying opportunities all over the place (though many of them turn out to be losing money opportunities!) and although I do agonise a bit over exactly when to buy I can make the actual decision to buy fairly easily.

But I find making a decision to sell incredibly difficult. If I've made a good profit I'm afraid that greed often gets the better of me and I think there's more to come, and that I’ll be kicking myself in 3/6/12 months' time if I sell now.

But if I've made a loss my natural reaction is to convince myself that it's just a blip, and it'll bounce back. I find it very hard to sell if it means a substantial loss, so although I fortunately haven't been in any of the disaster shares like Carillion if I had been I'd almost certainly have just gloomily watched them tank day by day, all the while thinking they were just about to bounce back.

The last time I recall that happening was with Railtrack shares, many years ago, and I kicked myself many times for not having had the courage just to get out while I could still retrieve something worth having.

I'm aware of the advice that if a share doubles you should sell half and keep the remainder `for free'. But that really doesn't suit me at all. If I were to do that I'd be kicking myself whether it subsequently rose or fell for only having got it half right!

I'm also familiar with the argument that you should ask yourself "Would I buy this share today?" and if the answer's "No" they should be sold. But when I've tried to ask myself the question the answer is nearly always "Well maybe not, but then again ..." which is less than helpful.

In order to try and impose some self-discipline I deliberately created two portfolios, one a long term, fairly high yield, fairly boring one in an ISA; the other supposedly a trading portfolio, where I buy with the intention of selling as soon as it's showing a decent profit.

But this often doesn’t work either. I'll buy a share to trade (HUR being a typical example) and then as I learn more about it I'll think it's actually a good long term prospect so that even though it's showing a decent profit I no longer want to sell!

There are also many times when a share is showing a modest but worthwhile profit - maybe several hundred quid after a week or two - but I just pat myself on the back for having spotted a good buying opportunity, and convince myself that momentum will carry it higher and produce a greater profit. And then when it starts dropping back I'm annoyed at myself for having missed the peak and hang on hoping it'll go back up again. Sometimes it does, but as often as not it just drifts back to where I started, or even falls below my entry price.

It's really infuriating. After all, a profit of £500 for a week's investment is a good return, and I know I should take it and never look back - but I can't resist. And in a market that's been rising generally so that making a profit gives the illusion of being a clever investor many of the shares that I have sold for a modest profit have continued to rise afterwards, which is not only jolly frustrating but is a positive disincentive to sell.

I know most readers here aren't traders, so this may all seem rather frivolous, but I would like to know how other Fools make their selling decisions. The only way I can see of resolving it is to impose strict rules that remove the decision making process altogether, but even if I did I'm sure I'd convince myself on the very first occasion that this particular share was the exception that proved the rule!

[tjh290633]

First of all, the market will go up and down, and you should ride out the various market gyrations. We are not talking HYP here but, if you adopt a policy of being nominally equally weighted for each holding, then you can judge when to trim a share by its value relative to all the others. I use the median holding value as my yardstick, but you can use the average if you wish.

My tactic is if a share reaches a certain multiple of the mean/average holding value then I sell a proportion of the holding. That multiple depends on how many shares you have, but let's say it is twice the mean/average, then I would trim back by 25% leaving my holding at 150% of the mean/average. If the share keeps on rising, then you can repeat the process as often as required. I've done it as many as seven times over a number of years.

You might wish to top up holdings which are appreciably below the mean/average to bring them up to weight, using the proceeds. You may also wish to sell if you feel that a share has achieved your objective for that share, whatever that may be, or to avoid a corporate action or takeover.

The other time to sell completely is if a share fails to live up to its promise, and you wish to cut your losses and run. In an HYP this could be if they decide to stop paying dividends, for example.

That's just some food for thought.

TJH

[77ss]

.....But I find making a decision to sell incredibly difficult. If I've made a good profit I'm afraid that greed often gets the better of me and I think there's more to come, and that I’ll be kicking myself in 3/6/12 months' time if I sell now...

Like you, I find this the most difficult area. I can't help with when to sell a loser, but I do have a general approach to winners

These days I think about top-slicing when a share gets to one third above average. Similar to TJHs approach. If I top-slice, I sell 25%, reducing my holding to the average. Whether or not I do actually top-slice at this point depends on a number of factors - the company involved, its yield, my CGT position, and whether or not I have a decent alternative home or use for the capital released.

Yes, you may miss out on a further rise - but you will still benefit from retaining a substantial holding ( I rarely sell a winner completely). The share you top-slice may of course fall, rather than continue to rise, and the share you put the proceeds into may do better - who knows. Over the years, this approach has served me well enough. Most companies hit rough patches at some stage. Top-slicing when times are good renders you less vulnerable to hard times (a general market crash is another matter). A classic example is RIO. A big winner during the mining boom, releasing loads of cash which I used build up my HYP. Come the downturn, the share price more than halved - and is still not back to 2011 levels. Had I never sold any, I would have been feeling a bit sick!

The aphorism 'run your winners' is less helpful, I believe, than 'always leave something for the next man'. Don't be too greedy and don't imagine that you can time the market.

....I know most readers here aren't traders, so this may all seem rather frivolous....

I don't think it frivolous at all. I choose to superimpose a bit of trading on top of my underlying HYP approach. In my situation (not everybody is the same) that just seems like common sense.

[scrumpyjack]

I have all the same thoughts as you CK.

Two other thoughts also prey on my mind when deciding whether or what to sell.

Firstly I ask myself why I should think that I know better than the market in deciding the 'right' price for a share. (I also used to think exactly that when using an advisory stockbroker, and it usually turned out that he did not know better than Mr Market, and inactivity would have been a much better course of action.)

Secondly an inbuilt aversion to paying tax. I really really really do not like paying CGT, so that is another motivation towards inactivity.

Also, looking back, the seven, or even ten, 'baggers', much outweigh the catastrophies so selling your winners is not a good strategy in my experience.

As I am now fully retired, however, my outlook has changed. I now do sell things, incur CGT (with sorrow but it doesn't stop me selling), because having lived through several bear markets, including the early '70s where the market fell from 540 to 170 quite quickly, I realise that ultimately you can only spend cash, not a paper profit, and if you're not earning anything it is a good idea to have several years expenditure in cash rather than being 99% in equities.

[moorfield]

I measure my HYPs overall income against a pre-determined target each year, which if missed I will then use as my signal to sell and recycle low or non yielding constituent holdings.

I also hold Carillion, which is expected to pay no dividend next year, so the overall income will have to rely on dividend increases from and top ups of other holdings. If next year's target is missed, which should become apparent around August or September, then Carillion will likely be sold. For now, I'm happy to leave it to the whim of Mr Market.

[BarrenWuffett]

I used to hold quite a few shares and the points you make are very familiar. In the end, I have come to believe that tinkering and timing are not a good strategy for long term success.

I think you have a set of rules which would include 'buy and hold for the long term' and ignore the ups and downs of the markets and only sell in exceptional circumstances...or you avoid shares and go down the collectives route.

This is the conclusion I arrived at after 'playing' the system for the best part of a decade. I have given up on shares and now hold mainly investment trusts and the global low cost Vanguard Lifestrategy 60. Of course, the temptation to tinker at the edges still remains...the VLS shot up last year as sterling fell creating an opportunity to make a quick killing...but the volatility is much, much lower with funds etc so the temptations are easier to ignore...also easier to avoid looking at my portfolio every hour!

My returns with the new regime (3 years) have been ~10% p.a. so actually better than I was getting with my shares portfolio.

[Howard]

I think it depends a lot on how old you are and your investing style! Having invested for over 30 years it is easier to make sales decisions. Given that markets are buoyant at the moment, personally I am selling shares if some commentators (who may know no more than me) suggest selling. One of the stockbrokers I use has a daily email and if they say "sell" for a share I hold then I generally do. This means that I am increasing my cash holding which is no bad thing if one believes the markets may fall in the medium term.

When I was younger, I kept a "virtual portfolio" of all the shares I sold on a web portfolio tool, recording them as though they had been purchased at the price I sold. It made depressing reading! Shares such as Asos and earlier ten-baggers were included, sold at ridiculously low prices, after minor blips in their performance. There were obviously some duds as well. This experience encouraged me to control my urge to sell. The problem then is that over the years one's portfolio grows into a large collection of holdings.

I have gradually built up an IT portfolio and a HYP style portfolio, which I don't expect to prune much. But I cant resist reading Paul Scott's column and have a modest fun portfolio with Barclays. For £6 a time it's fun to be a trader and channel ones buy and sell impulses, looking for the stars - BooHoo for example ......... but when to realise the capital appreciation? For the record, if Paul doesn't like a balance sheet or similar then I sell!

Don't know if this helps, CK. But you are right, it is not easy to sell an old friend - like Tesco!!

[scrumpyjack]

One has to bear in mind that a share price at any point in time generally represents the balance of views in the market. Simply because one commentator says 'sell' is no reason to sell. If anything the Lemming tendancy of analysts results, I think, in the situation that if the majority say sell, you should not, because that view will already be over discounted in the market. Looking back over 48 years of buying and selling investments, the best investments have been the ones that were absolutely the opposite of the market consensus view. One can often look back at historic valuations of individual companies and say - the market was absolutely crazy in valuing that company at that price at that time.

The worst performance was by a family trust where my wife was a 'sleeping' trustee and all decisions were made the the other trustee who was a stockbroker. Utterly disastrous and in the end my wife resigned as trustee rather than carrying on watching his self interested incompetence.

Still at my age I increasingly go for the Investment Trust and ETF approach. I can sleep more easily!

[doug2500]

I don't find it easy either, as long as the price is high. But when bad business performance is the trigger I find it increasingly easier to sell. In fact I almost feel relief to be out of the position.

I run winners and don't tend to sell them. You never know when the next takeover will pop up, or business outperformance. Although you don't know where the next profit warning will come from either!

My underlying desire is to buy the company and sell it on business performance rather than price. But then I'm LTBH.

[tjh290633]

My returns with the new regime (3 years) have been ~10% p.a. so actually better than I was getting with my shares portfolio.

That doesn't sound very impressive. Here are my accumulation units return since various year ends:

Since        Acc Unit   IRR      FTSE       IRR   
31-Dec-10       12.32   11.32%   5,899.94    3.54%
31-Dec-11       13.45   11.68%   5,572.28    5.17%
31-Dec-12       15.80   10.54%   5,897.81    5.04%
31-Dec-13       19.56    7.34%   6,749.09    2.73%
31-Dec-14       20.34    8.54%   6,566.09    4.70%
31-Dec-15       21.42   10.30%   6,242.32   10.29%
31-Dec-16       24.37    6.38%   7,142.83    5.66%

Admiitedly the FTSE figures are not for the TR version, and the accumulation results should be about 4% lower to be comparable, which shows how poor the last 3 years have been for the HYP approach, but evenso, nothing like -1%. The current accumulation unit value is 25.70.

The corresponding values for the Income unit value are:

Since  Inc Unit
Dec-10   4.46
Dec-11   4.30
Dec-12   4.96
Dec-13   5.88
Dec-14   5.83
Dec-15   5.90
Dec-16   6.44

Nov-17   6.45 Current value

The IRR will of course, be the same since the dividend income will be taken into account.

TJH

[Itsallaguess]

I don't find it easy either, as long as the price is high.

But when bad business performance is the trigger I find it increasingly easier to sell.

In fact I almost feel relief to be out of the position.

It's difficult to explain that feeling of relief until we discover it for ourselves....

I think most personal-investors go through the phase that CK has described, and I did so myself for quite some time, but I now see buying and selling as two parts of the same process with regards to the non-HYP section of my portfolio. I try to follow these guidelines generally -

1. Set a rationale for each purchase, and re-visit a share if that story changes during ownership.

2. Try to set a price-target, and at the very least carry out some top-slicing if that price is reached, and if a full sale is not warranted, then alter the rationale set down in the step above accordingly.

3. Don't have any issues selling dogs. You don't have to make up any losses by holding on to the particular share you lost capital on. Other prospects might have more chance of doing that than the dog....

4. Don't overestimate that you might always think 'what if I'd have stayed in xxx share' if you top-slice or sell completely and move on to other pastures. You will quickly forget that feeling, but you will remember the fact you banked some capital for much longer.

5. Don't underestimate the emotional benefit of getting rid of utter dogs in your portfolio if there is little realistic chance of break-even from current price-levels. You will get many calls wrong, and that is a fact of investment life. That said, you don't need to constantly remind yourself of that by holding onto near-worthless remnants as stark pointers to that fact....

6. If ever you find yourself wanting to brag to either yourself or others about a particular holding that's doing brilliantly, take that as your cue to at the very least top-slice the share, or even sell it completely. Chances are that within a month you will find that you could have bought it back cheaper and banked some profits......

Cheers,

Itsallaguess

[BarrenWuffett]

My returns with the new regime (3 years) have been ~10% p.a. so actually better than I was getting with my shares portfolio.

That doesn't sound very impressive.

TJH

I am just wondering if you misread my post...my average return is around (~) 10% (Ten) per year.

[hiriskpaul]

I rarely trade ordinary shares any more, but do still trade bonds and related FI stocks, and options. That alters things slightly as, apart from convertibles, upside tends to be finite (I never buy calls). A few things I have found that helps with selling:

1) Try to forget the profit or loss on the trade. This has no bearing on how good the investment stands right now and dwelling on profit/loss to date will feed emotions into what needs to be a rational decision.

2) For a security, what are the prospects of the security compared to the rest of the market? If no better sell. There is no point continuing to hold as an individual security carries significantly more risk than the market as a whole.

3) However, 2 does not necessarily apply if the security is part of a portfolio. The security may add useful diversification to the portfolio even if it is not considered to be any better than the market. I hold quite a few bonds/prefs that on their own are not particularly interesting or outstanding, but work well as part of a diversified portfolio.

4) What is the risk of holding, compared to potential reward? I frequently close out positions based on this analysis, if potential future returns are peanuts compared to potential losses for example

5) Do you still understand what is going on? Sometimes what management say on RNS, etc. just does not add up. If you are suspicious that all is not right, selling is often a good course of action. This is the opposite way round for the more common "If you don't understand, don't invest".

6) How does this exposure compare to another? When an opportunity presents itself I often need to raise cash to take advantage of it and that inevitably means selling other investments.

Most of the time, well over 90%, when I reduce or close a position I would have made more money by not doing so. But that does not usually matter as the proceeds frequently go on to be better utilised and deliver better returns than the closed out position.

[torata]

My returns with the new regime (3 years) have been ~10% p.a. so actually better than I was getting with my shares portfolio.

That doesn't sound very impressive.

TJH

I am just wondering if you misread my post...my average return is around (~) 10% (Ten) per year.

Actually I read it as minus 10% also. Now I can see you used a tilde.
But with screen sizes these days... or should that be "my eyes" these days?

Now back to the topic

torata

[tjh290633]

That doesn't sound very impressive.

TJH

I am just wondering if you misread my post...my average return is around (~) 10% (Ten) per year.

Actually I read it as minus 10% also. Now I can see you used a tilde.
But with screen sizes these days... or should that be "my eyes" these days?

Now back to the topic

torata

That is indeed how I read it, as a minus sign on my mobile phone screen. Sorry for the confusion.

TJH