When Should I Sell?
Grace Groner was born in 1909 in Lake County, Illinois. At age twelve, she was orphaned and, along with her twin sister, was taken in by one of the prominent families in the community. She attended the nearby Lake Forest College and graduated in 1931. At the height of the Great Depression in 1935, she secured a job as a secretary at Abbott Pharmaceuticals—a job she maintained for 43 years.
She never married, never had children, never owned a car. She lived in a small one-bedroom apartment in Lake Forest, did most of her shopping at rummage sales, and gave regularly to charity (though always anonymously).
It was quite a surprise then that, upon her death in 2010, she left in excess of $7.2 million as a donation to her former college, establishing a scholarship for underprivileged students.
How did she manage to amass such a fortune?
The same year she joined Abbott, she purchased 3 shares in the company for a total of $180. Though the shares split many times over her lifetime, she never sold a single one and reinvested all the dividends back into the business. She maintained this behaviour for 75 years, through a World War, the Great Depression, and thirteen recessions.
Ronald James Reed was born in 1921 into an indigent family in Dummerston, Vermont. In 1940, he became the first high school graduate in his family and enlisted in the United States Army. Following stints in North Africa, Italy, and the Pacific, Reed was honourably discharged and returned to Vermont where he worked as a gas station attendant and mechanic. He retired in 1979, but came out of retirement a year later and took a job as a maintenance man at the local J.C. Penney. He worked there for 17 years before retiring in 1997 at the age of 76.
When Reed died in 2014, he bequeathed the vast majority of his nearly $8 million fortune to the local hospital and library.
Once again, this came as quite a shock to those who knew Reed. Though friends knew that he was interested in the stock market, he was a frugal man that used safety pins to keep his fraying denim jacket closed and parking miles away from his destination to avoid paying the meter. He was a regular at the fast food chain Friendly’s, where a customer once paid for Reed's meal thinking he couldn’t afford it.
At the time of Reed’s death, he owned shares in 95 different companies, many of which he had owned for decades. He invested in companies like Pacific Gas & Electric, CVS Health, and Johnson & Johnson. He preferred companies that paid a hefty dividend and avoided technology stocks. He got his information on the stock market by reading The Wall Street Journal and visiting the local library (which he would later donate over $1.2 million to). He didn’t always get it right — he owned shares in Lehman Brothers which eventually went to zero. However, because he was so well diversified, it had a minimal impact on his returns.
Both Grace Groner and Ronald Reed came from underprivileged backgrounds. Both worked for many years in low-paying jobs and both lived well within their means.
In terms of their investing style, there were differences. Groner made one initial investment in one company — probably not a great idea, especially if it’s the same company you work for. Reed invested in nearly 100 over the course of decades and across multiple industries. However, both followed the same simple formula — invest in what you know and never sell.
That’s a brilliantly simple answer to perhaps one of the toughest questions that investors have to ask themselves , when do I sell? Reading both accounts above, never selling would seem to be the best advice you can give someone. But, of course, it’s never really that simple.
Warren Buffett says his favourite holding period is forever, and that’s great if you’re one of the best business minds of a generation, but even Warren gets it wrong sometimes and has to cut his losses.
David Gardner of The Motley Fool wrote a post a few years ago in which he asked the question, “what would have happened if we had never sold a stock?”. Looking at his Stock Advisor service, he found that the average return of the 146 stocks was 210%. However, had the service never issued a sell recommendation, the average return would be 261%. That included one stock that had increased 700% since they had sold it.
So how do we decide when is a good time to take a loss (or preferably a profit) and exit a position?
Unfortunately, there’s no right answer to this question. Everyone has different needs in life, different attitudes when it comes to risk, different financial goals. Some people are determined to let their winners run forever while others are happy to lock in profits when they see one.
Here’s an interesting thought experiment. Imagine your broker called you tomorrow morning and said they’d accidentally sold your entire portfolio. Which stocks would you instantly buy again? Which stocks wouldn't you?
That should give you some idea of your own mindset in deciding which stocks to hold or let go. It shouldn’t be the only question you ask though. In order to find the right answer, perhaps ask yourself some of the following questions and let the answers guide you in your decision making:
Do I feel comfortable owning this stock? Are you constantly worried about a stock? Is it keeping you up at night?
This is a question you should be asking yourself on a regular basis because there’s really no point in putting yourself through this stress. Investing is all about learning about the world, putting your money to work for you and growing your long term wealth. It’s not supposed to cause anxiety.
Some people can handle volatility and will hardly flinch at seeing a stock drop double-digits. Others can’t. You need to own stocks that are within your comfort zone. Get out or greatly reduce your exposure to stocks that cause these feelings and move into safer investments.
Do I need the money for a major purchase in the next 3-5 years?
If you need funds to make a major purchase, like a down payment on a house or a wedding, get them out of the stock market altogether. That’s not the place for them.
Those that were invested through Black Monday probably don’t need to be told this as they’ll know the feeling of watching their portfolio plummet over the space of a few days or even hours. If you haven’t experienced something like this, keep in mind that no amount of reading about it or trying to imagine it will come close to the feeling of being in it.
The money you have invested in the market is subject to the movements of the market. It’s not the same as a savings account, so don’t treat it as such.
Did I make a mistake investing in the company in the first place?
There’s no shame in admitting a mistake. It’s happened to everyone that has ever invested. No one has a 100% hit rate.
Looking back at an investment decision you made in the past and realising it was a foolish one can be a bit painful, but it can also be a learning experience. If you look back at an investment decision you made and think you fluffed it, sell it and move on.
However, it’s equally as important to make sure that you’re not letting short-term volatility force your hand. Just because a stock drops after one poor earnings report doesn’t mean it was a mistake to invest in it.
Did something change since I invested?
Maybe you made the right decision at the time but something has happened that has changed how you feel about the company. Is there a new boss who you don’t have faith in? Has management let you down too many times? Has the business shifted to a strategy you don’t fully believe in?
Do you believe the money could be deployed somewhere better?
Regularly saving and investing is the best way to improve your long-term wealth. If you are disciplined, you should always have some funds available to invest in a new idea.
Of course, this doesn’t always work in practice. Circumstances change. Some months you have other commitments that must be met first. So sometimes you may see a potential opportunity that you want to avail off.
Unfortunately, I suspect the vast majority of sells will not come from a careful consideration of the above questions. They will come when investors look at an investment is down, become frustrated, and sell emotionally. I’ve done it (and regretted it). I think every investor has probably done it.
But let’s try to remember that we’re investing in actual businesses. It’s easy to look at a stock that has performed poorly and think that means the business is in turmoil. It’s also easy to see a stock down 50% and think that it’ll never recover.
Try to imagine you own a stock that loses more than that. Imagine a stock that lost 93% of its value. If you own a stock that has dropped 93%, you need 1324% gain just to break even. That seems like a pretty hopeless situation right? You should probably sell it and take the loss right?
Well, that’s exactly what happened to Amazon stock in 1999. It lost 93% of its value, dropping from $86 per share to under $6. Of course, it did recover and then went up another 20-fold, but it wasn’t all happy sailing. The stock dropped 50%, 48%, 22%, and 24% over separate time periods over the next 16 years.
How many times would you have sold it?