This article has been written by an expert contributor Henry Jennings from Marcus Today. The views are his own.
How to Sell
The whole industry is geared up to buying stuff. Buy the dip. Buy low. Buy value. Buy growth. Buy yield stocks. Buying is really easy. Anyone can do that. Plenty of advice on how to do it. The harder thing is when do you sell?
There are three main reasons to sell:
- Cut losses and make the pain go away.
- Take profits.
- Sell something because there are better opportunities elsewhere.
It is one of the hardest things to do and one of the most neglected. It came up as a question at the course I do for kids the other night with one of the mums. She had bought a stock that had tanked and wanted to know when to sell. It was a horrible chart and she had lost money. What do you say?
Stop Losses
First off there is the easy answer, stop losses. It takes away the emotion. There are whole books devoted to how to set a stop loss. Marcus Padley has his Average True Range (ATR) to try to gauge the volatility of a stock and take out the noise and ensure that you do not get stopped out on the noise., But it is not a science, at least in my opinion, but a bit of an art and the ATR will dependent on how much risk appetite you have. You should probably overlay that at least in your trading plan. Trailing stops too are a great way to take out the emotion and lock in profits.
I know from my own experience trading CFDs (Marcus may banish me forever for even mentioning the products, Voldemort to some) that the market makers can almost see where the stop losses are and frequently, I found that there was a push on some stocks some of the time to trigger those stops, take everyone out, and then once the pressure is relieved the stock bounces. It was uncanny. The provider does not even have to have access to the stocks, you can probably work it out from a chart. And if the traders are all using the charts provided then they are all coming to the same conclusions and setting the same stops. Just a theory of mine, but one to be concerned about.
Not selling too early
The hard bit is not doing the research, getting close and understanding the potential but NOT selling it too early. I know that if it were me, I would have sold out way too early. Small fish are sweet. But if you keep taking the small ones you will never find the whale. So how do you stay strong and stay long. I guess part of the answer is setting targets and a valuation in your trading plan. The whole point of investment analysis is to compare something with something. When you value your lithium stock or whatever, there are guidelines as to what it is worth. You can compare it to a company further down the track. You can see what the market values a miner rather than an explorer or a project builder. You can see the timeline and work on the catalysts for the rerating along the way and base your trading plan on that basis.
Of course, it is not easy. If I have something that doubles, selling half means that the rest of it is free. I love that position to be in. Something for nothing. A position running that owes you absolutely nothing. Then you can sit back and watch and wait.
I am also a fan of feeding the turkeys whilst they gobble. You can only sell a stock when there are buyers. So, selling into strength works for me. Others may go with momentum and try to time the market and use those trailing stops to lock it in. It’s a great discipline. Anything that can take the emotion out of the decision is good. Fear and Greed are big human emotions and can cloud our judgement.
How many times have you ended up making a bad decision based on a tax issue for instance or based on that Fear and Greed?
How do you cut a losing position?
The hardest one of all is when things turn to custard. How do you cut a losing position that has gone so bad that you cannot even bear to look at it. There is the bottom drawer of course. We all have those. Dodgy mining companies or the like where it has stalled, dived and only just survived. It can be a long road back even if it makes it back. What do you do? Do you just cut and move on? Do you bottom drawer it? It could be a lottery ticket without an expiry date? Frequently not. Or do you average down. Let’s call it dollar cost averaging as it sounds so much better and thought out. Many will tell you that you should never average down. Never compound a bad position. Move on. But there are sometimes when the market gets it wrong. The market is not as efficient as it should be. It does not always value things properly so maybe, just maybe the investment case still adds up. But don’t be stubborn and don’t be so chock full of hubris that you think you are right no matter what. The market is bigger than you are. Always was, always is.
Sometimes when I have a position that is going wrong, I use a sift stop loss. A price to check if all the reasons I bought it for still hold. Sometimes I decide that I should sell some. It makes me feel that I am doing something and if it keeps going down then I can buy back more at lower levels and if Sod’s Law comes into play and it bounces then I still have some. It works for me. It may not work for you. My risk appetite is probably greater than others. I screen watch all day every day.
To Sum Up
- Have a plan. Stick to the plan but be flexible if new information will affect that plan.
- Take the emotion out of it. If you can
- Sell when you can, not when you have to.
- Set stop losses if you need discipline. Hard or soft.
- Use strength to ease out of positions. Nothing lasts forever.
- Don’t believe you are invincible, and you know better than the market.
- Put as much work into the sell strategy as you put into the buy strategy.
- Being able to sell, is as important as the buy. Anyone can buy. Not always easy to sell or manage a position.
- If you need to clear your mind, you can always sell and get back in again at another time. You are not barred for life from a stock.
Prior to making an investment decision, retail investors should seek advice from their financial adviser. This document is intended as general information only.
More about the author – Henry Jennings
Henry Jennings, Senior Market Analyst and Media Commentator at Marcus Today Stock Market Newsletter, has been involved in financial markets since the 80s in London before emigrating to Australia. He first joined Deutsche Bank and then Macquarie Bank as Head of Equity Trading in Sydney. Since leaving Macquarie, Henry has been both an institutional and private client adviser. For the last seven years, Henry has been writing strategy and insights daily and is a frequent media commentator on all things finance on ABC TV and Radio, SBS and Ausbiz. He also hosts a series of podcasts talking to industry experts and the popular live Ask the Analyst session for Marcus Today. You can sign up for a free trial here.
First published on 09/09/2022 on the Marcus Today website.