There have been many questions and discussions around ‘how do you know when to sell’.
While I am not Saul, and I am still learning, I can think of one simple measure to determine 'how you ‘know’. It may be easy to miss it but I believe it is nestled in something Saul already gave us.
If you choose investments in the same manner as Saul does you’ll notice that he doesn’t have very many stocks that live past its 1YPEG mark of 1.0. As a simple rule of thumb, I would say to start evaluating your next options as soon as your legacy stocks reach that point, and probably be developing a plan well beforehand.
Following the approach, it seems like Saul establishes some test positions along the way to see which stocks he’ll continue with after his other stocks do reach that high water mark. I would also think he’s pruning his higher 1YPEG positions along the way well before they approach that point, or shortly after if it comes up as a surprise.
The clues already given to us suggests Saul follows this strategy. For example, he told us he has reduced his positions in WAB and CELG (two stocks north of the 1.0 1YPEG mark) in favor of some of his new up and comers (e.g. INFN which is well below that mark).
If you follow this approach, buying and selling will be probably be more natural as you’re always on the look out for lower 1YPEGs and accumulating those while transitioning out of your higher 1YPEGs. Letting the numbers be your guide gives you more of an impartial view of the stock and can help free you from the emotional attachment.
I found myself using the same technique to eventually arrive at my “Let go Luke” moments (e.g. coming up with the 1YPEG numbers for all my stocks). Through the numbers and what they told me I had the support I needed to let go of some of my ‘old friends’ that have done well in the past in favor of some ‘new friends’ that I’m excited to meet. (I say all this knowing there will be a few old friends I’ll not likely do away with, but I am trying to be more rational just the same:).
Hope this helps you in your decision making process.
Best of luck!
As we discuss Saul’s approach to buying and selling, I thought I would offer my own approach as a counterpoint. After all, different styles may be better for different people. Saul’s approach simply does not resonate with me.
Here is my system:
I will first notice a stock when it has achieved rapid, large gains – basically, when it has gained a certain traction, often referred to as “momentum” by market mavens. This puts it on my radar screen.
I will continue to watch the stock as it accelerates higher and higher. I will channel check by watching CNBC (channel 153) and Fox Business News (Channel 133) – if the stock price continues to rocket upward, those stations will start to feature it.
At some point, as the stock reaches a point where it has created vast wealth for those holding it, I will become so envious I cannot stand it. This is my buy signal.
So, I buy the stock.
Eventually, the stock dips a bit – maybe 1%. I grab the opportunity and double down.
The stock hits a bit of a road bump and sinks more – maybe 5% or so. Well, if I liked it at $100, how can I say no at $93? Double down again.
Out comes a lukewarm report – but since the stock was priced for perfection, the stock tumbles, maybe down another 10%. It is still the same great company, now maybe almost 20% below its all-time high! Back up the truck!!
Well, some time goes by, and the stock starts to rise again, just a bit. My approach is vindicated!
Then, the pretty lady on CNBC get a very worried (but still very pretty) look on her face and says, “We have some breaking news from one of our ugly old reporters who we generally try to keep off camera as much as possible,” and the screen splits (90% for the pretty young anchor and 10% for the wheezing, out-of-shape rumpled old reporter), and the pretty lady says, “So, Arnold, I understand that the Fed will be raising rates by a quarter point sometime in the next decade, is that correct?” and Arnold says, “Yes Suzy, and . . . .” and Suzy says, “Thank you Arnold! Now let’s go to Missy and Rapunzel for analysis!!” And of course the stock craters, down 20%!
I am no sissy – I hold on valiantly. And, I reaffirm my stance by checking the price thirty or forty times a day.
The decline continues. Will this never end? OMG, I can’t take it anymore! AAAARGH!!!
An article comes out from Morgan Housel (who is legitimately the smartest guy out there) saying that if your investments are keeping you up at night, you are too heavily invested. Morgan is RIGHT!! And I am definitely having trouble sleeping. Why did I ever invest in that %^#$ company?
The price plummets further. I sell everything, generating tax losses that will shelter my future gains, down the road.
Rinse and repeat.
Of course, just as not everyone can implement Saul’s methods with the same effectiveness as Saul, it is likely that the above method will not be suitable for everyone. There are undoubtedly people on this very board who will find that it does not fit their own particular investing styles, and that is fine! That is why they have horse races! And canasta!
But for those people who hanker for something different, who get tired of the humdrum routine of finding profitable companies, etc. – well, now you have an alternative.
I thought I would offer my own approach as a counterpoint. After all, different styles may be better for different people. Saul’s approach simply does not resonate with me. Here is my system:
Hi Rich, I love your system. Have to admit that I’ve found myself using it at times.
I did exactly the same with AIG during the melt down in 2008
Never have enough courage to tell my wife about that
How can anyone compete with Rich’s intellect and formidable investing skills. He received the post of the day so even The Motley Fool agrees with him. I think I have been investing incorrectly and need to change my rules.