Thoughts about Selling
These are from different parts of the Knowledgebase so they may repeat at times, but do read to the end because there are some new ways of thinking down near the bottom.
I was inspired to post this by the recent discussions of MongoDB.
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.
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 sometimes happens), 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.
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!
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 a long time, 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.
There really are some times when it makes sense to sell a stock. Saying that “it would be better if I held” because at some time in the future the price may go back up up is not valid (it’s silly, even). Just think of a stock that you sold at $200. It dropped to $50. It gradually came back and now, 5 years later, it’s at $220. Would you say it would have been better to have held because it’s now up 10% in 5 years!!! That really is silly. You could have thrown the money at a dartboard of MF recommendations and beat that result by 500%. And could have done lots better than that by intelligent picking.
There’s a big opportunity cost to leaving your money in a stock which keeps going down, and then stays down, as well as whatever paper loss you have.
We all often worry when stocks we have sold go up. I try to ignore them. Once they are sold they don’t matter any more. Here’s a great quote from Huddaman: “I don’t really need to be right for the stocks I sell, I just need to right about the stocks I own.” Boy! Doesn’t that really say it all! It simply doesn’t matter what happens to a stock after you sell it. You can’t hold all the stocks in the market. Some stocks you don’t hold are going to go up. A lot! So what!!! The only thing that matters is what the stocks you are holding do!
How to handle the emotions. I don’t even think about the price I bought the stock. I promise you, I don’t consider it at all probably 95% of the time (especially since most of my portfolio is in IRA’s). I think about a position that I’m considering selling simply as a part of my portfolio.
For example, a hypothetical thought process: My portfolio value is now at $abc. AAA makes up 3.7% of my portfolio. It’s at a price of $yy. (That’s the price it’s at right now, and there is nothing I can do about it). Its fundamentals and its stock price are both deteriorating seriously, and there is nothing on the horizon that I can see that will magically turn that around anytime soon. Where can I put that 3.7% of my portfolio where it will have a better chance to grow?
As you see, there’s no consideration at all of the price I bought it at. In that thought process, the price I bought it at would be irrelevant.
You need to think of money as fungible, interchangeable. It’s only money. It’s not a share of AAA that you bought at $94, so you have to wait until it gets back to $94 before you sell it even if it takes five years. (Perhaps to make you feel better, so you won’t feel like you made a mistake when you bought it?) It’s just 3.7% of your portfolio, which as a whole is doing fine. Is there somewhere better you can put that money, that 3.7% of your assets, with a clearer path to a long-term good profit? That’s the question you should ask yourself !!!
I hope that that was helpful to someone at least.