Tuesday, February 28, 2012

Do you have a 'sell' strategy? Here's some advice

Investment guru and retired Princeton University economics professor Burton G. Malkiel points out in his classic "A Random Walk Down Wall Street," that "the past history of stock prices cannot be used to predict the future in any meaningful way."
In other words, luck is a factor in any investor's buying and selling decisions. My personal experience is that I'm an OK stock picker but selling at the right time is much more difficult. In fact, even now I ask myself, do I have a "sell" strategy?
Malkiel is of the opinion that you buy and hold your investments for the long term. Let the dividends reinvest. Build a diverse portfolio with a mix of quality investments and get a good night's sleep every night. That can be tough for many of us who fret when there's sell-off like the one we experienced in the third quarter of 2011. It can be tough when you look at a loser in your portfolio that needs to be jettisoned. Instead you hold on until it at least breaks even, right? I wasted a bunch of upside earnings doing that in the past five years.
So what rules can help you sell at the right time?
It may be easier, if you stick to some sort of self-imposed formula rather than trying to guess when a stock tops out and begins to show weakness. Rebalancing may be the best strategy. In other words, if your investment portfolio is 60 percent stocks and 40 percent bonds, but stocks shoot higher to a mix is 70-30, then sell off some of the stocks and put the money back into bonds, rebalancing the mix. The same strategy can be applied to individual stocks that become too big in your portfolio.
The people a Morningstar Information Service, which evaluates and ranks mutual funds, suggest that if you are poised to sell a stock, ask yourself why you bought the stock in the first place?
Did you love the company's fundamentals, they ask.
"Then you should know when they are changing for the worse. Was the company the industry leader? Then you should keep a close eye on the competition, and know when it is catching up to your company. Did you love the industry? Then you need to watch for an industry downturn. Did you buy the stock because it was undervalued? Then you should have a firm idea of what you think fair value is."
All of this requires that you at least once a year, evaluate your holdings in light of what's changed and why those changes have occurred.
My mother has been a very good stock picker. Over the years, she bought Exxon, GE, several large drug companies, 3M and Idaho Power, among others. Most everything has done well. Her banker now wants her to sell some of her Exxon to "rebalance" her portfolio. Fiftween percent in one stock is too much, she said. My mother is resisting.
Deciding to buy a stock is usually the result of some serious research but selling can get more emotional. I've tended to sell when I get disgusted with as stock's performance or with markets in general. That's always been a mistake. In many cases, it does no good to sell after the stock price has fallen. So again, why does my mother own Exxon? She likes oil as a basic commodity that's in demand around the globe. She sees little down side unless there's a big oil spill and the company gets sued.(BP for instance).
But if the reasons for owning a stock are still intact, the Morningstar advisers say, "then the rational approach may be to buy more of it at a lower price."
That strategy would have worked for me 99 percent of the time...except for the mortgage insurance company that finally filed for bankruptcy last year.
"Investing for Beginners" at About.com suggests that it would be nice if we could recognize an investment mistake before the stock takes a big hit.
If you are no longer confident in the company's prospects, "be willing to cut your losses and sell the stock. There is no law that says you have to hold onto a loser until you break even. Selling at a loss can also help offset capital gains tax consequences elsewhere in your portfolio," they point out.
When to sell according to About.com: - When earnings were not properly stated. Let's use Enron as an example of lying and cheating.
 - Debt is growing too rapidly.
 - New competition is likely to seriously harm the firm’s profitability or competitive position in the market place. 
 - Management’s ethics are questionable.
 - The industry as a whole is doomed due to a commoditization of the product line.
 - The market price of the stock has risen far faster than the underlying diluted earnings per share. Over time, this situation is not sustainable.
 - You need the money in the near future – a few years or less.
 - You don’t understand the business, what it does, or how it makes money.
While I generally agree with these reasons for selling, I also know that you don't make money by sitting on the sidelines with your money in a money market account that pays $113 of interest a year on $30,000. That $30,000 should do far better in some sort of mutual fund or stock with a 3 to 5 percent dividend, plus the potential for price growth.
So, yes, it's OK to sell, to rebalance, but be ready to get back in there, reinvest in something that you've investigated, understand and like as a new way to sweeten up your portfolio. Just keep your holdings consistent with your tolerance for risk.
And keep in mind what Professor Burton Malkiel said at the end of his book: "The game of investing is like lovemaking. It's much too much fun to give up. If you have the talent to recognize stocks that have good value, and the art to recognize a story that will catch the fancy of others, it's a great feeling to see the market vindicate you." Read his outlook for 2012 in the Wall Street Journal.
So sell the dogs and find some winners.

No comments:

Post a Comment