Your Sell Strategy, or: How to Suck the Joy out of Investing

The part I enjoy most about this Vector for Invective (blog) is the fact that the Financial Industrial Complex and the media that breathlessly feeds at its trough provides such a target rich environment for my vitriol; sadly I lack both the time and depth of vocabulary to truly do their vapid pronouncements justice.

“Markets declined today in a wave of profit taking”

Really? And what inspired the buyers?

“Sellers outnumbered buyers”

How the fuck does that happen?? You would’ve thought that if they were sellers, they would have had buyers. Otherwise, they’d still be holders.

But, most importantly: do not call “those people” investors. The so-called “retail investor” – that is: me and thee – is the only “investor” out there; the rest are “the market”. The ones that buy and sell based purely on speculation are our fodder. They are often referred to as “smart money”, and as I’ve posted elsewhere, they are anything but. But we need them; they move the market for us with their short term vision, allowing us to make a good buck on a sale, or ridiculous downturn.

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So that was fun, and it brings me to my point, and yes I had one.

Investing is easy.

Let  us assume for the sake of this conversation, that “Investing” is the act of purchasing some kind of marketable security, whether mutual fund (heaven forbid), stock, ETF or bond. Let’s assume further that you care about the outcome of your transaction, that you’d like to conform to Rules 1 and 2 attributed to Warren Buffett, so you do some research, perform due diligence, maybe digging deep into ratios like Price/Book or technical analysis like relative strength index (RSI). And so you buy.

For a little while, you enjoy the warm glow of a well thought out transaction, and maybe the gods will even allow you the pleasure of paper gains, i.e. the theoretical gains you enjoy if you were to sell. And then, like ants eating at the walls of your otherwise well-constructed house, you start to hear/read about the weakness of your holding, your decision. Your bank might have Greek holdings, Millennials eschew the landlines and program bundles of your telecom, WTI, Brent, Keystone, China …

And how do you know all this? Because of a critical part of the human brain called the reticular activating system (RAS). It is believed to play a role in many key functions such as sleep, the beating of the heart and, apparently, sex (just saying). But, in this information age, likely the most important role it plays in our conscious days is the ability to focus our attention on something, to filter for what matters. And because you own that stock, your brain’s RAS alerts you to relevant information; I’m pretty sure though that this critical function does not come with a bullshit filter, that part is still up to you.

You’ve put together a pretty decent set of rules to govern your purchases; do the same for your sell strategy and prepare yourself for a wash of largely useless information prepared by the mindless hordes and pundits that sit at the feet of “smart money”

“This boy and girl that gather pearls of wisdom

Falling from his mouth

Wash off the blood, wash off the rum”

–REM

Some “pearls of wisdom” best left in the dirt:

“this stock is over-valued”

So what! You’re not a buyer, you’re an owner. If it’s over-valued now, that means it’s gone up and you’re sitting on some paper gains – see above – and unless you need the money or the fundamentals of your pick have not changed, sit tight.

“the easy money’s been made”

Not even sure what that means. You should sell because now it gets “hard”?

“this stock failed to meet analysts’ forecasts”

Easy one! The analysts screwed up. Your question should be: are the fundamentals intact? Is this a buying opportunity as the pendulum swings hard the other way, sympathetic to the analysts’ stoopidity? My tale: whispers abounded that Walgreen would execute a tax inversion with the acquisition of Swiss Boots Alliance. Barclays raised their stock target to $92 from $56!! (Walgreen had been trading in a $70 pattern during the time of this prescient upgrading). Of course Walgreen did not go through with the inversion and got promptly kicked to the curb – down 20% on the day – by the very investors that bought it on the news of the inversion, and of course Barclays reduced their forecast to $60-ish based on every other factor than the one they got wrong. Fundamentals were not only intact, but had improved with the acquisition! 6 months later, the stock has resumed it’s growth pattern.

For a final word on forecasting, I’ll hand off to the Washington Post’s Barry Ritholtz:

“I come not to praise forecasters but to bury them.

There is a forecasting-industrial complex, and it is a blight on all that is good and true. The symbiotic relationship between the media and Wall Street drives a relentless parade of money-losing tomfoolery: Television and radio have 24 hours a day they must fill, and they do so mostly with empty-headed nonsense. Print has column inches to put out. Online media may be the worst of all, with an infinite maw that needs to be constantly filled with new and often meaningless content.”

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Maybe you’re like me, and you’re in it for the dividend and find yourself bombarded with all kinds of negativity or plain bullshit about your stock’s “yield”. Yield being the current annual dividend divided by the current stock price. Maybe you should sell now because of the ever-decreasing yield; lost in translation: the stock price is increasing. What you should in fact be considering is your “yield on cost”, i.e. your current yield divided by your purchase price. Perhaps you have already received 2 five-percent increases to the dividend that has driven the stock price up 20%; your current yield will in fact be lower than the day your purchased.

And let’s never forget the market bears, probably the one’s that said “the easy money’s been made”, warning people of being the last ones to the party. They will have you believe that they are “the smart money”, that you are the “retail investor”, the stoopid one. They will warn of the impending stock apocalypse because the S&P finally crossed territory not seen since 2008, as if it were stunning insanity that 6 years of gains are finally recovered. New highs! Record highs! Step away from the punch bowel Stoopid One!

But, isn’t upward momentum really a series of “new highs”?

Stay calm! Stay invested! But have rules. And follow the rules more often than not.

And finally to swing back to the premise that devising and following your sell strategy really sucks the joy out of investing, let me illustrate from my perspective. I have two portfolios. One is based on a simple variation of the Dow Dogs Theory applied to the TSX100. My buy rules are simple, and my sell rules are equally as simple and I rebalance annually. During rebalancing I sell any stock that does not comprise the top-5 yielding issues, excluding income trust conversions and miners. It is so easy that it is painless, even in years where no action – other than re-investing dividends – is mandated, or worse, something is sold at a loss. Hold your nose, follow the rules, move on. Easy-peasy. Up over 12% compounded annually.

The second is loosely based on the S&P Dividend Aristocrat index. This one requires thought. It requires that RAS filter. It is painful because here is where mistakes are made: you fell in love with your pick, you got greedy, you ignored a fundamental change in the business, you assumed a change in the business would be fundamental. I get it: information overload.

A final note on rules: do not fall in love with them. The world changes. Warren Buffett once commented on his ownership of Gillette, feeling very comfortable about the many men getting up every morning to shave. A quick trip to the nearest hipster coffee shop quickly puts the lie to that sentiment. Be prepared to roll with change.

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