As I have probably hinted at, my punching out a Blog method is quite sort of random sometimes. I was going to write about how I Filter out good potential stocks from duff ones in a quick ‘Triage’ type process, and then I thought maybe I should do it logically and start with how I find stocks to shove in the Filter in the first place.
But, oh no, that is far too sensible and easy to follow. So, I have decided to write about what makes me Sell stocks. So much for a logical order of things…….
This is really in response to an ADVFN Bulletin Board comment on the CAMB board after my recent ‘Buying Rationale’ Blog (many thanks Imranawan for your helpful inspiration !!). The gist of the post was that my Blog was ok and it was helpful to read about reasons and thought processes for buying a stock, but how about reasons for selling?
I intend to write Blogs of varying lengths fairly soon after I do any Trades - Buys or Sells - so Readers can understand my reasoning. So the theory is that over time, you will get plenty of examples of what drives me to sell - hopefully in a good bit of depth.
If you pop over to my Website Page that is headed ‘WheelieBin / WheelieWatchlist’, you will find that the WheelieBin stuff gives a good insight into the kind of stocks I try to avoid. Obviously if a stock I hold falls into one of these categories, it will probably become a Sell. The most obvious one is that of Valuation - if a stock gets up near a p/e of 20, I start to get jittery.
Anyway, I thought it might be helpful if I bash out this Blog and try to give a General Set of Rules that would make me Sell - or at least think about Selling and maybe Topslicing. I will also try to give examples of some actual trades I have done.
General Approach to Selling
In reality, I don’t seem to Sell very often - maybe that explains why I have too many stocks !! I am very much a ‘Buy and Hold’ Investor (not a Trader as per my earlier Blog) and I put a lot of effort into Researching Companies in great depth and when I buy, I am buying a Stock that I think will deliver me with good returns year in and year out for many years possibly. However, don’t get me wrong, I am an opportunist and I will sell after a few months or so if the Shares move up strongly or some other good reason to Sell comes about - I will explain this more fully as these Blogs develop.
Inactivity however is not necessarily a bad thing - I bet many people would make more money if they traded less - but, ok, it would be a bit tedious. One reason for Superior Returns would simply be that Trading Costs were reduced - even with the brilliant www.iweb.co.uk who charge £5 a Trade Commission, you are still looking at probably a minimum Buy Cost of about £20 to £25 (remember the Buy/Sell ’spread’ is a cost to you) and that is on relatively small sums of money. If you trade large amounts, your Stamp Duty will add to these costs in absolute, if not in percentage, terms.
It is important to keep costs down - Investors must realise that so much is outside our control, that we must control what we actually have the power to control (did I really use the word ‘control’ 3 times there? Oh, balls, I just said ‘control’ again, oops, and again….)
This ‘Buy and Hold’ mentality is even more entrenched in my Income Portfolio (see my Website Page on Trades / Current Portfolio for more details). The idea of this Portfolio is that I am after Dividend Yields - at the moment and for many more years I am reinvesting the Divvys but in time my intention is to use the Cash generated to go towards my Living Expenses - so it is like a steady, pretty reliable, Revenue Stream for me and it saves me having to sell Stocks just because I need some cash to buy Beer and/or Curry (usually ‘and’ applies here).
My Income Portfolio is very much a ‘Lazy’ Portfolio - I really do not want to do much to it - so Selling will be very rare I suspect. If I Sell something, then I only create the hassle of having to find another Stock to replace it - you would think it was easy but I find it is not that simple to find the kind of stocks I want and that will fit with the others in a fairly well diversified mix.
The main reason I would sell a stock in my Income Portfolio would be if the p/e ratio just got too overstretched to the upside and, consequently, the Dividend Yield just dropped too low. I would not necessarily panic to sell such a great stock (it is obviously great as it has gone up so much !!) and would probably hold onto it until something to replace it had been found. It depends really. Remember, the Divvy generated by the Stock would still be at the Divvy Yield when I first bought in - so I would still be getting a nice Sum of Cash generated from it - it is just that I could be getting a higher payout if I switched into a Stock with a higher Divvy Yield.
As per my earlier Blog on Stoplosses, I have a psychological aversion to these things, so I do not use Stoplosses in my Income Portfolio. If a Company in my Income Portfolio comes out with bad news, I do a thorough assessment of the Company again and decide whether to hold on or if the time has come to ditch it - this is not an easy decision and will depend on many things. I guess the worst possible scenario would be the total removal of a Dividend Payout - but a cut in the Divvy may still be ok. It really depends on what the Company is actually doing about its problems - does it have a clear Programme in place to sort things out? Are the Directors up to the job? Does the Company have the financial strength (Balance Sheet and Bank support) to ride out it’s problems?
My Unit Trusts are sort of similar to my Income Portfolio - just that the swines don’t generate any Income !!
I mean they are similar in the sense that they are a low activity, lazy, part of my Overall Portfolio. As I am sure I have mentioned in the past, one great thing about them is that they are quite hard to sell in terms of the hassle of actually having to phone up and mess about - which tends to make me even more lethargic on them. This is no bad thing - just by holding them for many, many years they have returned very good gains.
If Sloths could talk, type and operate a calculator they would make truly excellent investors….
I classify my Unit Trusts as much higher in Risk Levels than my Income Portfolio - partly because the Income Portfolio divvys help to ‘smooth’ any returns from Capital movements in the Portfolio; but also because my Unit Trusts are focussed on US Smaller Stocks, US Tech, US Healthcare, European Smaller Stocks - all these areas are very prone to ‘Market’ Risk - i.e. They tend to move up and down with the overall Markets (Indexes) and probably are ‘higher Beta‘, with bigger sized moves. They also expose me to Currency Risk - although this has been widely helpful this year with the US Dollar appreciating against the Quid Sterling.
The logic for holding my Unit Trusts is that they give me exposure to areas of the Market where I have little understanding or Time to Investigate, and they give more Diversification (some would argue diWORSEification !!). In effect, I am ‘outsourcing’ the management of these areas to Fund Managers with a good, proven, track record of returns. This means I am very reluctant to sell the Unit Trusts I now hold (see my ‘Trades / Current Portfolio’ Page for more details) as I want to have exposure to Tech, Health, US and Europe for the Long Term. However, I might Trim them at some point - just not yet.
I did however sell an Invesco Japan Smaller Companies Fund that I had held for many years. It had done very well recently but if I look objectively at it, I simply do not UNDERSTAND the Japan macroeconomic situation and I see no reason to have exposure to Japan in the wider context of my Overall Portfolio. In all honesty, I should never have bought into Japan in the first place - it was a Buy I did many years ago when I was a fairly inexperienced Investor - I should never have bought because I did not really understand the Japanese Economy - I listened to too many ‘Experts’ who said everyone should Buy Japan…….
The consensus (always dangerous !!) view seems to be that Abe’s QE Money Printing will propel stocks ever upwards - I am not convinced and I think the Risks against this are off the scale. Japan is a very ‘crowded’ trade - and I always worry when everyone and his hound is convinced that it is a one-way bet - interestingly, you never seem to hear anyone saying Japan is a Short…….
Expanding on this, I think to invest on the basis of Macroeconomics is very dangerous - Macro is just too complex and unpredictable. I find that sticking to individual (and easier to understand) stock stories is much more successful. For instance, the whole World has been saying Interest Rates must go up and that Bond Yields are too low for 5 years - and yet they have been wrong. Similarly, the Vast Consensus says you should buy Gold - wrong again - it just goes down. ‘Experts’ say QE will be Inflationary - Wrong again……Deflation is the new worry. Forget Macro, it is useless.
In my view, Japan is simply an utter Basket Case. It has aging demographics, low birth rate, low immigration (so cannot compensate with new Young Workers to generate wealth), completely insane Public Debt levels (highest in the world) and it is financing Government Borrowing by Printing Money (QE) and the Central Bank buying Government Bonds - it is complete madness. I do not see how this can end well and from what I can see, ‘Abenomics’ has actually resulted in a deeper malaise and higher debt. What on earth is going on? And as for Abe’s “3 Arrows” - I think he has lost his Bow……
Now I hear they are having another General Election - they are all bonkers - Abe has only been in a short while.
I used to work for Fujitsu, a Major Japanese company. What never ceased to amaze me was how they put up with incompetence and poor performance everywhere within the business. The culture is very regimented, no one is allowed (or able) to think for themselves, and the bureaucracy is extreme. Unbelievable, what a farce - if this is how Japanese companies are run, it is no wonder the Economy is screwed……..
Anyway, I think you get my point !!
Now a Yen Warning - I sold out of my Unit Trust back in about April 2014. Since then the Nikkei Index has shot up hugely, so you would think I screwed up and sold too early. However, because I was not Sterling Hedged against the Yen, my Cash taken out is STILL WORTH MORE TODAY BY ABOUT 5% than it would be if I had left it in. So the Stock Gains were massively wiped out by Yen Weakness.
If you are in Japan (do you really think this is such a good idea? Or are you just following the ‘experts’?), it really does make sense to use a method of Currency Hedging. One way might be to do it as a Spreadbet where you bet in Pounds Sterling.
Right, that’s plenty for Part 1 - Part 2 may see the light of day next week, although got some other stuff lined up as well….
Have a great Weekend,
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