"I would like to ask your thoughts about rebalancing portfolios. You mention you the weight of your portfolio has been influenced by the uneven growth in your share holdings.
I hope to stay firmly investing with a long horizon too.
You mention buying when you think a company is good value.
Can I ask what makes your sell a stock. Or perhaps give a personal example where you have sold. I assume it’s not due to a price decline.
Have you ever sold when it’s overvalued. you believe some (much) of your holding are just that currently."
@Gareth,
All good questions, I think.
Because, while the process of buying a stock is relatively straightforward, the question of "when to sell?" is a deeply vexed one.
"Rebalancing" my portfolio is a subject over which I have spent a great many hours of my life ruminating, but about which I some years ago, ceased to think... despite not actually coming to any worthwhile conclusion.
You see, while I find that I am OK at knowing when to buy stocks; I have learnt that I am simply woeful at knowing when to sell them, i.e., I like to think I am able to discern
under-valuation, but I've got very little idea of being able to identify
over-valuation.
Far too many times over my investing career I have bought shares in premium-quality businesses, happily watched those shares increase in value and then, sold them when I "deemed" them to be overvalued.
Only too see the share price continue rising for years to follow, while I - instead of happily participating in the continued upside that I failed to appreciate - was forced to hand over some of my sub-optimal profits to the tax office (!).
I have therefore come to learn that high-quality, long-duration, organic growth companies might, at certain times, certainly
appear to be expensive (like RHC did at $80, and which CSL does at the moment), but with the passage of time, the underlying growth soon starts to chew into the premium valuation multiples.
So I tend to avoid selling those sorts of stocks, almost no matter what.
Of course, when I will sell them is when I am of the firm view that there has been a major adverse change in the business model, or the growth strategy. (For example, I spent a lot of time thinking about RHC's French and UK forays in this light at the time, but couldn't convince myself that this was a totally flawed thing to do... I still today don't think the jury is totally back in on this score. Similarly, when CSL acquired Seqiris in 2014, ARB set up manufacturing in Thailand, and when BRG relinquished the Keurig distribution agreement, and right now, REH and RWC are each undertaking huge acquisitions which is causing me to do much soul searching about whether this reflects a fundamental change in their respective business models into which I have bought.)
The other problem with selling - and it is a nice problem to have - is that many stocks that I own today, I first acquired 10 or 15 years ago, at prices a lot lower than where they are today.
It means that, if I sold them today, the resulting capital gains tax would be so high, that it actually makes no financial sense to sell these stocks (because I would only be at a neutral after-tax financial position if those share prices fell by something like 30% or 40%.... at which level they would cease to be overvalued again, so....)
Therefore, as you can probably tell, my default for these kinds of situations is to do nothing, unless there is really, really
very compelling reason to act.
When I have acted quickly in the past, the result has invariably been an unsatisfactory one, so these days I tend to be a slow thinker and a slow mover, preferring to contemplate my navel for a period (weeks, even months) before doing anything that will prove to be too rash.
As a case in point for RHC, take this current situation wherein the private hospital sector is anecdotally ceding share to the public hospital: a decade ago, I would surely have been spooked into selling my RHC holdings; nowadays, I'm a lot more circumspect about the alarming catch-cry of, "This time its different".
However, at this stage I want to distinguish between the class of stock I've described above: (namely, premium-quality, prudently-managed, scale-able business model with enduring commercial moat, resilient free cash flow, unique product/service offering with high barriers and strong organic growth), and a class of stock of far lesser investment pedigree, namely deep-value, cyclical, inferior-quality crud (aka "cigar butts").
For better or for worse, if you looked at the 40-odd stocks in my portfolio (way too many, I know, but when you have a disinclination to selling, you inevitably end up with a zoo of stocks), you will notice a somewhat schizophrenic approach to investing, with some high-quality, pristine companies with pristine business models (a la ARB, ASX, AUB, BRG, CGF, CSL, DLX, MQG, NHF, REH, RHC, TCL, WES... I'll call these "
Class A" stocks); as well as companies - call them "
Class B" stocks - that are either deeply cyclical (eg. MND, LYL, SDI, SNL, TME, VRT) or indeed have quite dubious, or untested, business models (e.g., BOL, KME, KOV, LGD, ZNT).
That's because whenever I come across something a bit sub-prime in pedigree - a "
Class B stock" - that I believe is trading at a value of 30c or 40c in the dollar, I can't help myself: I simply have to buy it.
It is a bit of a character flaw, I fear.
Sometimes, buying "
Class B" works, but often it doesn't.
(I suspect that if I received a truth serum injection, I would end up admitting to the effort-to-reward ratio, from playing the "
Class B" game, being too high. But it is fun. And it keeps the senses honed.)
At any rate, to get back to your question of when would I sell a stock:
While, as discussed, I have a strong reluctance to ever selling a "
Class A" stock - when it comes to "
Class B" stocks I am happy to sell quite readily... the circumstances for doing so being either when the upside (due, for example, due to a cyclical earnings recovery, reduction in discount-to-NTA, capital management, etc.) I envisage is realised, or when I realise that I am simply plain wrong and have made a fundamental error of judgement (usually involving that fools errand of "calling" the cycle incorrectly.)
"Can I ask what makes your sell a stock. Or perhaps give a personal example where you have sold. I assume it’s not due to a price decline. "
Interestingly, I was only a few months ago conducting a bit of a review of shares that I had sold over the past few years (a bit sad, I know, but I find it to be quite an instructive exercise).
In summary, I find that there are three broad sets of circumstances under which I sell shares:
1. When they are subjected to takeover:
Examples of this happening over the past 2 or 3 years are:
ACX
COF
HSO
PRG
SKE
SMX
SFH
SGN
WFD
WHK
The striking thing about that list is how many simply poor quality companies end up getting acquired by other companies (arguably, the only decent companies among that lot were ACX and WFD).
2. Deeply Cyclical Stocks Which Have Recovered From Cyclical Lows:
Examples:
ANG (*)
OSH
RIO
WOR
(*) Yes, I know... deplorable business. I'm not particularly proud of myself
While I almost always profit from doing so, somewhat surprisingly, playing the cyclical game is not something that I am overly fond of doing, possibly because holding shares in commodity businesses makes me fell like it somehow sullies my portfolio.
As a result, I seldom buy cyclical commodity business very often (which probably makes sense given that commodity business cycles have a relatively long frequency, so the real slam-dunk opportunities probably only present themselves once every 7 or 8 years and when they do, it is only for a relatively short period of time), and when I do end up selling these sorts of businesses, I find that - because I don't care to milk every last % point of upside - I tend to do so well before their highs. No matter, though, because I think its a bit of a mug's game, anyway.
Selling for reasons 1 and 2, as discussed above, is a relatively easy thing to do, because the decision is largely made for you (your shares are either compulsorily acquired, or in the case of cyclical "plays", their value has risen meaningfully to the point where they are no longer unambiguously cheap and are already pricing in some form of cyclical recovery).
Selling for Reason 3 below is a lot more challenging, however.
3. When I Have Made a Fundamental Error in Assessing the Business:
Sometimes, the business I have bought ends up being quite different - qualitatively and quantitatively - to what I believed at the time of my purchase.
This difference might arise out of a flawed assessment on my part to begin with, or because the business actually underwent some sort of significant and unforeseen fundamental change while I owned it.
Bringing oneself to the position of selling because one realises and acknowledges that one has, simply, made a fundamental and analytical mistake, or because something has occurred to cause a company to change fundamentally, is a far more difficult thing to do; because it goes against all of one's biases and preconceptions.
The following stocks I have sold over the past few years because I found that I had made a mistake, or because I thought had changed business model significantly to something that I did not care to own:
AMA
ASW
KOV (*)
ISD
MYX
ONT (*)
REF
RMD [#]
SDI (*)
(*) Have not sold out completely; merely reduced holdings to reflect changed assessment of business model/management
[#] Selling was a mistake which I today regret.
So, I hope that answers some of you questions, with the added disclaimer that this represents just one particular world view; which happens to work for me in the context of my personal and financial circumstances.
You could have this debate with 10 people and they could all quite validly come up with 10 different approaches to selling stocks, all of them probably perfectly plausible rational.
All I know is that I have developed a loathing for incurring tax liabilities at the same time as foregoing further capital appreciation; so I try to sell only when I am very sure that I should do so.
Investing and owning publicly listed companies is a proven path to wealth creation.
Trouble is, tinkering too much with portfolios inevitably leads to value leakage.
....
(20min delay)