Selling

One thing that Saul is very good at is selling stocks. Many here over the years have mentioned they are paring down large portfolios (some with 100 stocks or even more). I think most of us know what our favorite companies are. We know what we want to add to. But how do we know when to sell? Here’s what I’ve learned so far.

1. Sell companies whose revenues are no longer growing meaningfully – even if they are great enterprises.

Examples
Starbucks (SBUX)
Procter & Gamble (PG)
Exxon (XOM)
Disney (DIS)
Chipotle (CMG)
Under Armour (UA)

These companies had years and sometimes decades of great revenue growth, but now are lumbering behemoths that simply aren’t growing like they used to, and aren’t likely to do so in the near future.

Rule of Thumb: Over the last couple years, we on this board have been able to reliably find companies which have revenue growing in excess of 40%. There are plenty of companies with revenue growing slower that may be worth owning, but to me it makes sense to look for something with growth in this neighborhood, since we’ve found so many of them. Maybe at first, don’t worry about that companies you own that are growing at 20% or 30%, but start by cutting the ones that are growing less than 10% per year.

2. Sell companies that are growing revenue rapidly, but unsustainably.

Past Examples
3D Systems (DDD)
GoPro (GPRO)
FitBit (FIT)

These were flashes in the pan, with a lot of hype and fantastic growth numbers – but it turned out to be growth that was not at all sustainable.

Present Examples (Bear’s best guesses)
Snap (SNAP)
Roku (ROKU)

Identifying these is a judgment call, but extremely important.

Rule of Thumb: Read up, ask questions on this board, and err on the side of caution. If you aren’t confident that a company’s growth is sustainable, it’s probably best to sell, because there are likely some companies you can be confident in.

3. Know that #1 and #2 are not enough to ensure success, but that the lack of them ensures failure in the long run.

Certainly there are other important concepts in investing besides revenue growth. If you’re great at valuation, you may be able to buy “cigar butt” companies while they’re undervalued and make money – but if you hold them too long, they’ll stop gaining value if revenue isn’t growing. (If the pie isn’t growing, the profits you can squeeze out have an upper limit.) To me, trying to do this is simply getting too cute. Sell these companies.

There are easier ways to make money in stocks. Namely, find companies that are growing rapidly in a sustainable fashion. In the long run their value will compound, to your amazement. (You probably already own some, as I said, but you can also read the monthly reviews Saul, myself, and others do on this board for some ideas.)

Bear

PS - I also endorse trimming anything that has grown too large, even if it’s a company you still love and believe in for the future. Cut it back to 10% or 15% max. NOTHING deserves an allocation of 20% or more of your portfolio, in my Fool opinion.

122 Likes

Interesting thoughts.

I agree your theory makes sense in a bull market like we’ve had recently… but the stocks we all discuss here will fall far more than the others on your list if/when the market corrects or if we go into a recession.

I have about 10 percent of my portfolio in Saul type stocks… and the rest in larger, more mature companies. They may not be growing as fast, but the do pay dividends, and there’s a much better chance that SBUX, DIS, AAPL, JNJ, etc. will still be here, probably still growing, in 10 or 20 years.

Not discounting anyone here… I’m a fan… but there’s nothing wrong with some caution and conservatism. And there’s likely truth to the idea that everyone’s a genius in a market like this.

One thing that Saul is very good at is selling stocks. Many here over the years have mentioned they are paring down large portfolios (some with 100 stocks or even more). I think most of us know what our favorite companies are. We know what we want to add to. But how do we know when to sell? Here’s what I’ve learned so far.

  1. Sell companies whose revenues are no longer growing meaningfully – even if they are great enterprises.

Examples
Starbucks (SBUX)
Procter & Gamble (PG)
Exxon (XOM)
Disney (DIS)
Chipotle (CMG)
Under Armour (UA)

These companies had years and sometimes decades of great revenue growth, but now are lumbering behemoths that simply aren’t growing like they used to, and aren’t likely to do so in the near future.

Rule of Thumb: Over the last couple years, we on this board have been able to reliably find companies which have revenue growing in excess of 40%. There are plenty of companies with revenue growing slower that may be worth owning, but to me it makes sense to look for something with growth in this neighborhood, since we’ve found so many of them. Maybe at first, don’t worry about that companies you own that are growing at 20% or 30%, but start by cutting the ones that are growing less than 10% per year.

  1. Sell companies that are growing revenue rapidly, but unsustainably.

Past Examples
3D Systems (DDD)
GoPro (GPRO)
FitBit (FIT)

These were flashes in the pan, with a lot of hype and fantastic growth numbers – but it turned out to be growth that was not at all sustainable.

Present Examples (Bear’s best guesses)
Snap (SNAP)
Roku (ROKU)

Identifying these is a judgment call, but extremely important.

Rule of Thumb: Read up, ask questions on this board, and err on the side of caution. If you aren’t confident that a company’s growth is sustainable, it’s probably best to sell, because there are likely some companies you can be confident in.

  1. Know that #1 and #2 are not enough to ensure success, but that the lack of them ensures failure in the long run.

Certainly there are other important concepts in investing besides revenue growth. If you’re great at valuation, you may be able to buy “cigar butt” companies while they’re undervalued and make money – but if you hold them too long, they’ll stop gaining value if revenue isn’t growing. (If the pie isn’t growing, the profits you can squeeze out have an upper limit.) To me, trying to do this is simply getting too cute. Sell these companies.

There are easier ways to make money in stocks. Namely, find companies that are growing rapidly in a sustainable fashion. In the long run their value will compound, to your amazement. (You probably already own some, as I said, but you can also read the monthly reviews Saul, myself, and others do on this board for some ideas.)

Bear

PS - I also endorse trimming anything that has grown too large, even if it’s a company you still love and believe in for the future. Cut it back to 10% or 15% max. NOTHING deserves an allocation of 20% or more of your portfolio, in my Fool opinion.

40 Likes

Bear - Thanks so much for the great advice!

1. Sell companies whose revenues are no longer growing meaningfully – even if they are great enterprises.

I truly can not thank all of those on this board who take the time to answer questions, post comments and advice. This is real life money and can really make a meaningful difference in a portfolio! I hope someday to be wise enough to be able to offer sound advice as others join this magnificent forum.

Best regards,

GaFez

todd wrote: “Not discounting anyone here… I’m a fan… but there’s nothing wrong with some caution and conservatism. And there’s likely truth to the idea that everyone’s a genius in a market like this.”

Everyone should follow their own guiding principles for investment. So Todd, if your method is right for you it is the best path for you to follow. Never blame anyone else for your buying and selling decisions.

However when you make statements like the one above about everyone being a genius in a market like this I take exception. (If I am misreading your comment please disregard)

What is really going on in the current market? Since the first day of trading in 2018 one of the benchmark indexes, the DOW, is up about 1.9%. A broader and more frequently indexed, S&P 500, is up about 3%. This not what you call a “red hot” market. Many on this board are up over 30%. I am a private guy so I don’t post my port or gains. My port reflects much of the thinking on NPI and here.

This is not blind lucky stock picking and following “MAD MONEY”. I suggest a little more respect to the real work some of the excellent poster on this board put forth.

32 Likes

Paul, I cannot agree with your implication that this rich seam of fun we are mining, a.k.a. ‘the party’, will go on for ever. Novices might take your investing advice to be good for the long term!

9 Likes

Paul, I cannot agree with your implication that this rich seam of fun we are mining, a.k.a. ‘the party’, will go on for ever. Novices might take your investing advice to be good for the long term!

Strelna,

I know there are many things we will never agree on, and that’s completely fine. I usually read and understand your caution, but here I believe you err. Please read my post again. I don’t believe I said anything that’s not good advice for the long term. Sure, if there comes a time when we can no longer find companies growing at 40%+, we’ll have to settle for 30% or whatever. But the principle remains…here is the crux of what I said:

Namely, find companies that are growing rapidly in a sustainable fashion. In the long run their value will compound, to your amazement.

Do you honestly believe there will be a time that isn’t true?

Also, the post was about selling. I firmly believe that anyone, especially those holding 50+ or 100+ stocks, can do a lot of good for their portfolio and their future by selling the chaff. It may be harsh…and don’t misunderstand me: I’m not calling Disney, or Starbucks, or Under Armour “chaff” as companies. I’m saying their stocks, now, are chaff. These companies have had incredible pasts. But in investing, we have to think to the future. We can’t hold on to something just because it worked for the last 10 years.

And we can’t always be correct, either. But we must endeavor to find growth…to find companies that are doing something game-changing, and collecting tons of customers because of it.

Bear

22 Likes

…SBUX, DIS, AAPL, JNJ, etc. will still be here, probably still growing, in 10 or 20 years.

If there’s one thing I’ve learned from reading this board (and there’s been a lot more than just one) it is that I reevaluate my holdings on a very regular basis. In fact, I try to keep up on a nearly daily basis. I’d like to think the companies I’ve invested in will still be growing vigorously for 10 or 20 years, but I’m not banking on it and that’s most certainly not the primary reason for my investment decisions. When the story changes, it’s time to sell and find a greener pasture for my capital. Bear has simply indicated one of the easiest markers to identify when the story has changed.

The fact that those stalwarts might still be growing somewhat in 10 or 20 years is totally irrelevant to me. I’m interested in making money now. And the fact that the fast growing stocks tend to also be the more volatile stocks does not scare me off. Last year I was up 83% as of Friday (6/8) I was up 37% for the year, not quite the same pace as last year, but still a lot. So we move into a period of contraction (typically lasting 16 months) and my portfolio gives up 30%, I’m still way far ahead that if I held stalwarts that give up 15%. And I don’t anticipate that the losses would be permanent, painful for sure, but no matter what happens I don’t think SHOP or SQ or PSTG (I could list several more) will be irreparably damaged.

If we have a meltdown like we had in 2008, it won’t make much difference what you’re invested in, everything will take a bath. But even a storm of that nature will pass. It will just take longer than the 16 months for typical bear cycle.

8 Likes

“…However when you make statements like the one above about everyone being a genius in a market like this I take exception. (If I am misreading your comment please disregard)…”

I guess the word ‘genius’ was originally used sarcastically to express doubt about stock picking. When one thinks that something works in the stock market, it doesn’t anymore. The style here is getting into and out of rides quickly. In principle you could stay for the ‘long term’ or you can quickly switch to a more attractive one. In practice the latter often occurs.
If one can distinguish between ‘unstainable and sustainable growth’ then s/he is on the way to riches. How do you do that? the answer seems to be to look at the past trajectories and momentum. Also, the time scale discussed around here is a couple of quarters to decide to hold, buy or dump. If it shows in the numbers, then one may be more inclined to stay in or add but at any indication of a potential hiccup or weakening in the numbers, the stock is dump rapidly. I have to say that this is not automatic. I did see on a few occasions when the stock pulled back and practitioners adding because ‘nothing had changed’, or sometimes the adding was just a prelude to get out after the stock bounces back from the low.

It is a style. It is definitely more exciting than the old buy and hold.

There are many ways to get there just don’t do something that will not get you there.

tj

Do you honestly believe there will be a time that isn’t true?

usually you needed:

rapid sales growth
high returns on capital
reinvestment opportunties
and
intelligent capital allocation

but I’d be the first to admit that different types of growth (ala subscription growth, esp. if the market views it as permanent) get rewarded very differently

Not just top line growth, cause anybody can grow if you are willing to accept subpar returns. Maybe the key is high returns on capital too, cause then people are willing to accept pay me later valuations. I’m still trying to figure this out, but you guys and gals here are awesome!

And we can’t always be correct, either. But we must endeavor to find growth…to find companies that are doing something game-changing, and collecting tons of customers because of it.

great comment! course, even in ‘chaff’ you can make money though playing the ranges perhaps is one way to be successful, but as you said you’ve got to stay in tune with the story, but I really like your aggressive mindset here

2 Likes

I read your post again Paul. Yes, I honestly believe there will be a time that finding companies worth buying growing at 40% or even having to ‘settle’ for those growing a meager 30% (!) on astronomic multiples of sales and yet with the real probability of trading success will be impossible. It’s called normality. We live in charmed times. We have been able to discard ‘sales are vanity, profits are sanity’ along with all the rest of that useless baggage like er, return on invested capital; ah, the nostalgia. This game is much more exciting. PEG? Ditch it!

Bill Nygren of Oakmark will continue to do very well. Those flocking here with conviction they have overturned all the principles of value investing for all time will not. I expect they will join Saul’s theme, for flexibility is essential (he has it; do they?)

Meanwhile we rock on. I find your posts invaluable and try not to miss them, especially the notes about your investments - for which, thank you.

11 Likes

I also note in passing that we find all our reliable growth in just one sub-sub-sector (business services) of a sub-sector (software) of a sector, technology, just to make the point of difficulty in finding such reliability: extraordinary, you might say; an eternal opportunity? Doubtful. Charmed times (that is to say let’s all cheer low interest rates, QE, tax cuts and global debt (yay! I mean whoops, don’t mention that. I used to say (poetry) ‘Keep your eye on the Baltic Dry’ but now I’m saying ‘Keep your eye on the DXY’. I am unbelievably positive, I am enjoying having no less than 10% (I know, it’s a lot) in our sub-sub. Go Saas!

1 Like

Man oh man, Bear - you’re preaching to one side of my brain. My NFLX position has grown to nearly 30% of my portfolio. My brain is battling it out. I did sell some last year, but the growth this year has been nuts. If that baby falls - I’ll get hammered.

~TracyK

2 Likes

Man oh man, Bear - you’re preaching to one side of my brain. My NFLX position has grown to nearly 30% of my portfolio. My brain is battling it out. I did sell some last year, but the growth this year has been nuts. If that baby falls - I’ll get hammered.

All in all, a nice problem to have, eh Tracy?

Congrats and good luck on your decision of what to do with the proceeds. Maybe think about this: if the 30% position was all cash and you were going to buy stocks with it, how much of that would you invest in NFLX at these prices?

Bear

11 Likes

if the 30% position was all cash and you were going to buy stocks with it, how much of that would you invest in NFLX at these prices?

Bear, what an insightful way of putting it!
Saul

7 Likes

What a great question, Bear! As of this moment - NFLX is up $16.25. I did put in a limit order to sell just a bit. If the order was to go through…I would consider WIX, MU, and TWLO. I still haven’t found a way to do follow up investments in companies that I like.

Thanks for the conversation,
~TracyK

2 Likes