Some people like this approach. It can be refined in several ways - for example, you could say “when a stock doubles from my Buy Price, I will sell One Third of my holding”. There are lots of ways you could cut it. You could extend the Rules and say “when the stock triples from my Buy Price, I will sell another Third of my holding.” etc.
The beauty of this kind of approach is that it takes your emotions out of the decision - the Key is to make things Mechanical, Robotic and Rules-Based. I know I have tweeterererered a few times about the idea of having a set of Rules written down at the start of each Calendar Year - I do exactly this myself. So these kind of Selling Rules could be written clearly into your Rules Document and you must then follow your Rules in a disciplined manner - no umming and ahhing, no shilly shallying, no ducking and diving, no Milk Today Please - oh, sorry, that’s something else - you just get on with it and follow the Rules.
Let Pre-Determined Rules drive your behaviour, not your crazy, unpredictable, emotional, mind.
Something Better comes along……the ‘Beauty Contest’
This is a situation that I have taken advantage of a couple of times, but in all honesty, not enough. The simple theory is that you have a fixed Portfolio in terms of the number of Stocks - for example, let’s say you have 15 Stocks - I often refer to them as ‘Slots‘, the idea being that Stocks are ‘Slotted in‘ and ‘Slotted out‘ over time. The theory is that you RIGIDLY STICK TO THIS NUMBER and only Buy a New Stock on the basis that you throw out one of your Old Stocks. This idea really appeals to me but I have totally lacked the discipline to do it - I really need to get a grip !!
It’s truly brilliant. The way it works is that all your Stocks are always taking part in a ‘Beauty Contest’ (looking at some of my duffers, you could say it was an ‘Ugly Contest’ !! ). So, if you come across a New Stock you fancy, it is compared to all the other competing Stocks in your Portfolio and if it is prettier than one of them, you kick the relatively ugly Contestant out and the New Love of your Life comes in ………I really like this approach, I need to work on doing this.
For my own style of investing, I suppose I am slightly constrained by having a strong preference for investing in a Diverse mix of Themes and Sectors. However, I am sure I could use a ‘Beauty Contest’ approach within those Themes and Sectors.
Topslicing for Portfolio Balance reasons
If you have read my Blogs on ‘Position Sizing’ (if you look under the ‘Archive‘ part of my Blog Page at ‘October 2014‘ you should find 2 Blogs on this subject), then this might make more sense to you. My methods for ‘Sizing’ my Positions in each Stock mean that you put more or less money into a Stock depending on its Market Capitalisation and perceived Riskiness. On this basis, if you pick a great Stock and it goes up and up, you can fairly quickly get to a situation where a Stock that really should be only about 2% of your Portfolio for instance, becomes 5% of your Portfolio. If this happens, it is good practice (from a Risk Management perspective) to Topslice and bank some Profits.
Many people fail to do this - the danger arises because unexpected Events can literally come out of the blue. Just because a Stock has done extremely well, does not mean it is immune to the usual Risks inherent in any Stock, particularly with regard to Smaller Market Capitalisation Stocks. So, one minute you are up 200% and telling all your mates what a Genius you are, and the next minute, an Accounting Fraud is announced and you look a total Wally.
Don’t let this happen, you will not like being called names. Believe me, you look much cleverer to your mates when you say, “my wonderful XYZ Stock has gone up 200% but I realise I have got a bit lucky and I have halved my position and banked a lovely profit. I have kept a bit in because I think there could be more to come, but I know the Risks have increased”.
On the whole, I think people utterly underestimate or, worse, mentally and subconsciously choose to ignore, the possibility that an Unexpected Event can strike with no prior warning. This doesn’t need to be a purely Stock Specific Event - those of you who were in the Markets on Sept 11th 2001 will know how Global Events can impact massively and speedily - and they can come totally ‘Out of the Blue’ - a Black Swan if you like.
Some superb stocks can end up just boring you to tears. I have this problem at the moment with Alliance Pharma (APH) - I totally love the company and think the Market just totally fails to see its potential - but the reality is that I have held this for years and years and it has done Sod All. OK, I have had a tiny dividend each year, but it has been very useless. Anyway, this is what I mean by a ‘Boring’ Stock and it is on a Red Card - my patience if finally wearing out.
So, occasionally, you just decide that one of your Stocks has been given enough chances and it is time to part company. Of course, once you do this, it then gets a Takeover Bid within a week and goes up 50% - but that is the ‘Thrills and Spills’ of the Markets………
Taking advantage of a ‘Beauty Contest’ approach as outlined above, could be a way of dealing with your more tedious Portfolio team members.
Can take no more…..
This is really the worst of all these ‘selling drivers’. This is as a result of not using Stoplosses. Sometimes I get in the situation where a Company just goes from bad to worse - it is an inevitable consequence of Investing in Stocks without the Safety Net of a Stoploss (blimey, as I write this I am thinking what a great idea Stoplosses are !!).
If you look under the ‘Archives’ bit on my Blog page, and click on ‘November 2014‘, you should find a Blog entitled ‘To Stoploss or not to Stoploss? - that is the Question’. This goes into detail on my constant struggle with whether or not to use Stoplosses. I am coming out in a Cold Sweat as I type this…….
When I have a stock that falls on bad news - such as a Profit Warning or some other Event like silly Director’s Deals (OPAY), I reassess the situation and if I think it is a temporary problem I will hold on to the Stock. With Profit Warnings, the old saying “Profit Warnings always come in Threes” I find to be very appropriate and it is often the case that I will ‘Average Down’ once I am very certain the Stock is over the worst - this is often demonstrated by the Technicals of the Chart improving and giving clear Buy Signals. I am working on a Draft for an ‘Averaging Down’ Blog and it might appear next week….
However, sometimes Stocks just do not get better and it gets to a point where I just cannot take any more of their silliness. It is a horrible place to get to but sometimes it happens. Once at this point, it is best just to sell it and move on - but, crucially, you must invest time in trying to understand what went wrong and could you have foreseen problems when you bought in. Sometimes it is clear where you went wrong and you can learn a good lesson for the future. Other times, there was nothing you could have done. Generally I find these kind of disasters only really happen on small stocks - big FTSE100 type companies nearly always recover - but it can take years.
I got caught a couple of years ago on PV Crystallox Solar (PVCS). When I bought in, it looked like an undervalued stock with a nice cash pile that made Solar Chips - a hot sector you would think. However, my lack of Chip Industry knowledge kicked me hard in the rump here - the Stock was on a low p/e (around 7 or 8 I think) for a good reason - China was starting to dump lots of Solar Chips on the market at under the Cost of Production - there was no way PVCS could compete and they got into huge problems.
It was a classic ’Value Trap’ - where it looks great value according to the usual Valuation Metrics but it is a stinker in reality - beware of Stocks that seem extremely Good Value. Anyway, I stuck with it for a couple of years, but every time it seemed to improve, there would soon follow a setback. In the end, it had to go - I lost a lot of cash - probably 85% of my Investment. Ouch.
This is probably the worst of my Selling Reasons and a bit ‘fluffy’ and potentially dangerous - so care is needed as per usual. You have probably been here yourself, sometimes you just get a little ‘nervous’ about a Stock - your level of conviction seems to have dropped off a bit and you are just not happy with it. Often it is hard to put your Finger on - but something just does not feel right. Luckily I have trained myself to not think this way too much, but it still happens and sometimes you just have to give in to it. I don’t get too hung up on it - if I feel this way, then it might as well be Sold - especially if I have a good Profit anyway - sort of cushions the blow to know you have banked a great gain.
It also helps you avoid stocks - many a time I have not bought something because “it just didn’t feel quite right” and it turns out that the Stock was a total duffer. I think this sort of comes with Experience to a large extent - you get a ‘feel’ for what works and what doesn’t.
Part 5 of Selling Triggers is written and will hit the Blogosphere in coming weeks….
I hope this helps you fine tune your Investing Approach - just by writing it down I know it is helping mine - Win Win !!