The Art of Selling
“It struck me that selling smart is probably the single most important element of investment success over the long haul." ~ Sanjoy Bhattacharya
The market downturn over the last six odd months has made me return to the drawing board on the art of selling.
Selling is one of the most difficult disciplines in investing. We have simple rules to sell. They are as follows:
When we find a better company to switch to
When the management does something negative that we did not anticipate
If there is headwind in the industry
If our stop loss is hit
Change to the overall market regime - New addition to our process
In a very choppy market, investment stop losses are usually not hit and the stock keeps going up and down before the major fall comes in. We exit at the major fall. This, at times, is also very close to the short-term bottom. And the stock can then slowly recover after we have exited fully or partially.
When we go to cash, there are two main considerations:
Protect the portfolio from catastrophic losses.
Not to miss out on a large part of the recovery when it starts
When the market is falling, no one knows how far and for how long it will fall. So, at some point, when the protective stop losses are triggered, it could very well be near the bottom. But that can be only known in hindsight.
The objective is always to protect from large losses. Also, when the recovery starts, and we are in cash, the portfolio tends to underperform for a while because the cash component acts as a drag. This is a trade-off that we need to make. There is no optimum way of handling this problem. Some managers decide to sit through the entire drawdown. I prefer getting out and then getting back in when things are slightly clearer.
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