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.