When to sell
Of course, buying stocks is only one half of running a succesful share portfolio. We also need to know when to sell. And, just as important as “when”, is “why” to sell.
Many new investors don’t really have a strategy to guide them on when to sell. Consequently, they either sell too early or too late.
There are lots of theories out there on when and why to sell a share, but in QAV, we only sell for a number of very clear reasons.
1. Sell if you need to free up cash for something else.
Perhaps you need cash to buy a house or pay off some debts. Selling off some of your share portfolio makes sense. But if you hold a portfolio of 15-20 stocks, which ones should you sell? Tony suggests he would start by selling any stocks that are below what you paid for them so you can crystalise the loss to offset against your profits at tax time. Then he would sell the stocks that aren’t performing to expectations.
2. Rule #1
Warren Buffett says that his “Rule #1” is to “never lose money”. Tony agrees and QAV has our own version of Rule #1. It’s to sell a stock if it drops below 10% of what we paid for it. This is basically a stop loss mechanism. Regardless of how much science we apply in our selection process, sometimes that market is just not going to go our way. A classic value investor would just buy and hold until the stock lives up to its potential but, as Tony says, you could be waiting a long time for that to happen. After the 2008 Global Financial Crisis, it took the ASX twelve years to get back to where it was before the crash.
Tony argues that there are better opportunites to invest in during the time you’re waiting for that last stock to recover. If the market turns against it, we are better off exiting our position and putting our money to work for us somewhere else.
Of course, this means paying extra brokerage, which eats into our final profits, but it’s a small price to pay if the stock continues to drop.
Tony is typically buying parcels of stock in the millions on every trade, which means his brokerage is in the thousands of dollars per trade. And he still thinks he’s better off selling than holding.
However – there is a caveat to Rule #1. Rule #2 is “Don’t Drive Yourself Crazy By Refreshing The Screen Every Hour”. When we buy a stock, the tendency is to monitor is like a newly-hatched chick in a den of vipers. It’s easy to drive yourself crazy by checking it every few minutes. Tony says he’ll try not to pay too much attention, but if he happens to notice it’s dropped by more than 10%, he’ll sell.
He will also have a look at the stock’s normal trading range. If it normally trades between 80 and 90 cents, he won’t panic if he buys it at 90 and it drops to 80. It might come back up again.
3. Sell on Bad News
Sometimes a company can come out with bad news, eg the CEO or CFO resigns unexpectedly, or it issues new results which changes its valuation. In situations like this, it’s okay to sell.
4. 3PTL Line
The main reason we will sell a stock is if it breaches its “sell line”, ie the three point trend line we draw based on the lowest monthly prices on a five-year chart.
5. Commodity Sell
As discussed in our section on commodity sells, we will sell if the underlying commodity price becomes a sell.