Here’s an invaluable gift from Saul in the Knowledge Base regarding selling. Thank you Saul. We are grateful for your willingness to share your words of wisdom:
“…Sometimes you have to sell. You can adopt the MF mantra that if you just hold on it will come back in time, and maybe it will. But I hope to employ that money in much more profitable ways than watching a stock go down and then hoping it will start to come back. It you sell it five years later because it never came back (as they occasionally do), you not only suffered the loss, but you suffered the opportunity loss as well. That money could have been making a profit for you in another company’s stock during those five years. ?
?Not accepting that an investment could be a mistake as it continues to go down is a dangerous error, and could be very expensive. A big problem investors have is getting attached to their previous decisions and not being willing to consider that they may have made a mistake. Some of the most angry I’ve seen people get on these boards is if you criticize a stock that they’ve fallen in love with.
I try to always pay attention to criticism of a stock, to reevaluate my investments, and to get out if it turns out that I’ve made a mistake, or if the situation has changed. Which is why I rarely end up holding stocks for 5 or 10 years.
Sometimes changing your mind in the face of new evidence, and selling when necessary, is the most important thing you can do. If you are wrong, you can always buy back in. I think that being willing to change my mind in the face of new evidence is one of the most important skills I have. And learning that it’s okay to change your mind when appropriate is one of the most important things I try to teach on this board. Let me remind you that I sometimes make mistakes getting into a company (big mistakes, on occasion), but that I am willing to consider the possibility that I was wrong, and change my mind when I see that I actually was wrong. And that that is very important. Although I realize that I make mistakes, I don’t regret my decisions. I figure I did the best I could at the time. And sometimes I make mistakes getting out too. So what! I can’t be right all the time.
You don’t have to be right about the stocks you sell, just the ones you hold in your portfolio. It simply doesn’t matter what happens to a stock after you sell it. The only thing that matters is what happens to the stocks that you are holding. Think about that!
If you sell 10 stocks over time because you have legitimate questions about them, and you were “wrong” about some of them (they eventually do all right and move up), so what? As long as you put the money in stocks that you are happy with, that’s what counts!
There’s no such thing as “I was so far down I couldn’t sell”. The stock price has no memory of the price you bought it at. It’s at the price it’s at. That’s the reality of now. The question about any stock is “What decision should I make about it now, at its current price and its current prospects?” Not, “What price did I pay for it?” unless you are planning for tax losses or gains. Price anchoring is a big mistake.
Forget the price you bought something at. It’s at the price it’s at now. If you think you should sell it, say to yourself “I’m fed up with this stock and I no longer like its prospects. Where else can I put the same money where it will do better?” That takes a lot of the emotion out of the decision.
In making a decision to sell, it doesn’t matter now what price you bought it at. What matters is what you think it will do from here! If you suspect that it may be down for several years, or even down for good, don’t focus on what you paid for it. You can’t make it go back in time to where you bought it. I’d suggest you put the money into something better.
It’s not logic, it’s common sense. For example: I originally bought some ABC as high as $21 and $22 (as well as some around $17 and $18), but when I decided to get out and put my money elsewhere because it wasn’t panning out, it never even occurred to me, and I mean that honestly, it never even occurred to me, to wait until it got back to $22 so I could break even on those shares. I sold at an average price of about $17.50 by the way. (It was at $14.48 when I wrote this entry to the Knowledgebase).
Another example that I’ve used before: Early in the 3D printing craze I bought some DEF at about $15.30 I think. That was the price it was selling at. I never considered trying to wait to get it 25 cents cheaper or even a dollar cheaper. Later that same year it got to $190 for about a 12-bagger in less than a year. Do you think I remembered, or cared, whether I spent $15.10 or $15.40 per share?
I added to my GHI even though it had run up considerably from my initial purchases. I had initially bought at $27, but I added a lot more at $47. Should I have hesitated because it had been cheaper a few months ago? Should I have berated myself because I didn’t buy more then? And maybe decided to wait and see if it would sell off so I could get some cheap? No way! I bought it at the price it was available at. I eventually sold out two years later at $144.
When I first bought JKL at $38 and $40, it had been as low as $25 just seven months before. So what could I do about that??? I wasn’t even aware the company existed seven months before! I bought it when I found out about it because I thought it was a buy then. Now, none of that is “logic.” It’s just common sense as I see it.
The MF has a lot of propaganda about how you should almost never sell. However, if you make a well thought-out decision to sell several stocks for what you perceive to be good reasons, and then make an equally well thought-out decision to buy several replacement stocks for what you also perceive to be good reasons, it’s simply not plausible, and it’s even silly, to assert that you will not end up better off. It would imply that your judgment in picking stocks is just terrible. If you look at two stocks and say to yourself “This one is a Sell and that one is a Buy,” don’t you think that on average the ones you think are buys will do better? I’d bet a bundle that, on average, the ones you figure are buys will do better than the ones you figure are sells! If not, why are you bothering to evaluate stocks at all?
Why hold on to your failed positions? They have little going for them except that you are already in them. I doubt you would dream of buying most of them now if you didn’t already have a position in them. I just don’t think you should hold on to a poorly functioning company on the basis that it might transform itself into something successful some years from now.
I’m not saying my replacement stocks always do better than the stocks that I’ve sold. What I’m saying is that I do my best and use my judgment, and over time I expect that companies I think are going to do well will, on average, do better than companies I think will do poorly. (If not, I should just put it all in an index fund.) If I sell a particular stock and it then outperforms my replacement stock over the next quarter, so what? I’m not perfect. I’m just trying to do a good job. That’s how I think about it anyway.
To simplify, the Gardners’ point of view is that if you buy the same amount of 19 stocks and 18 do terribly but one is a 20-bagger, the one that is a 20-bagger will make up for all the losses. Therefore you should never sell your losers. That works in theory, and on paper, but in the real world, if it’s a portfolio with your money in it, it doesn’t work at all. That’s a pretty radical thing to say, so I’ll make clear why it is so.
First of all, if you don’t sell any of the successful stock on its way to becoming a 20-bagger, it soon becomes 70% or 80% or 90% of your entire portfolio, as the losers shrink. Now you have a portfolio with 19 stocks but one is 70% or more of the entire portfolio. You are not going to sleep nights with one stock at 70% or more of your portfolio. Not with your real money in the portfolio. Remember, this stock doesn’t have a sign on it saying it will end up as a 20-bagger. It’s just a stock and all you know about it is that it’s 70% of your portfolio and bouncing up and down. You will probably sell some of it at varying points all the way up, keeping it at a maximum of 20% or 25% of your portfolio, or maybe less. And the rising stock will thus never balance all the losers.
Add this to the fact that the ones that go down keep sopping up more and more percent of the total investment as you “double down,” “reduce my average cost,” “buy at better value points,” and generally put in more and more money in at lower and lower prices. For example, on the WPRT board, which used to be a MF favorite, when the price dropped from $32 to $25 lots of people felt it was a bargain, and bought more, and at $20 “doubled down”, and “doubled down” a second time at $15, etc. It’s hard for people to see a stock they believe in go down to what they think are ridiculous levels without buying more (it’s at $2.60 as I write in Jan 2020), especially if it’s misleadingly still labeled a “Buy.” People see this “Buy” that is down to half what they paid for it. Of course they will sell some of a winner that is making them nervous to buy more of the “bargain” stock.
Unfortunately, if you had 18 stocks that went to zero and one that was a 20-bagger, you probably would have ended up putting much more into each of the ones going down than into the one that went up, AND you would have sold a lot of the one going up on the way. It’s natural. I’ve done it myself but try hard not to do it any more. Which is why the MF hypothesis doesn’t work in real life. It’s the difference between a series of recommendations and a real-life, real-money portfolio.
If the market was efficient no stock would ever go up or down 30% in a week (it would have been already accounted for), and you’d never be able to make a 10-bagger. Fortunately for us, the market is often very wrong about a stock (either too high or too low at times)…”
Once again, I think I speak for all of who participate in your board, and for our families when saying thank you. We are very grateful for your words of wisdom, Saul.
sjo