To sell or not to sell

Recently, I called up my customers to recommend that they reduce their position in the market, in line with my view that the market is rather frothy & that a correction- when it finally comes- would be very sharp. While not expecting everyone to agree with my view, I was pleasantly happy that most of them see my point. However, what's surprising is that the majority of my customers who agree with me, do not want to reduce their position. Here is some of the illogical reasons given for not selling:

1) The market must go up one more time before a sharp correction can happen;
2) The interest rate offered by banks for various deposits is so low that it's better to stay in the stock market;
3) I do not believe in partial selling. When I sell, I will sell everything.

I must admit that selling in a bull market, like buying in a bear market, is a very difficult thing to do. I come across a post entitled "Books that will help gain sanity in insane market" by Vitaliy N. Katsenelson's ContrarianEdge where the first book on the list was "Its When You Sell That Counts", by Donald Cassidy. I have reproduced the relevant section of his post in entirety here because I find it is very well written & truly captured my thoughts on the same subject.

Selling is usually as popular as candy the day after Halloween. During secular bull markets selling is frowned upon as buy and hold turns into investing religion. And since sell violates the “hold” covenant of that religion, the investor who buys and sells is labeled as a nonbeliever, or even worse, a trader (if you say “trader” fast enough it sounds like “traitor”).

In secular bull markets, on average, sell decisions are not as rewarding as hold decisions, as market valuations are expanding and even second-rate dogs (stocks) start looking like pedigreed cocker spaniels. Every investor is now a “long-term” investor and sell becomes a four-letter word. But being a long-term investor is not about the longevity of your hold decisions, but rather is an attitude. Holding a stock because you bought it is a fallacy; you should only hold a stock if future risk-adjusted return warrants it.

Warren Buffett has been mistakenly promoted (though, I’d argue, demoted) into deity status in this buy-and-hold temple. Let’s correct this mistake. Warren Buffett became a buy-and-hold investor when his portfolio and positions got big enough, pushing $60 billion, so that selling became a difficult undertaking. In his early career, before “Oracle of Omaha” was his moniker, he was a buy-and-sell investor. Being on the boards of some of his biggest holdings (like Coke and Washington Post) made selling even more difficult.

One doesn’t need the benefit of hindsight to know that at 55 times earnings Coke was tremendously overvalued in 1999. Coke, like the majority of Buffett’s top public holdings (Washington Post, Procter & Gamble, Johnson & Johnson, and many others), did not go anywhere for a decade. I dare you to take a look at his top public holdings and tell me whether he would have done a lot better if he had sold them when they became fully valued (or slightly overvalued). In most cases, that would have been a decade ago.

Emotions assault us from different directions when we face a sell decision: If it is a losing investment, we want to wait to break even. This is the wrong attitude. Our purchase price and sell decision should not be related (the only exception I can think of is tax selling). Or when it comes to selling a winner, we want to sell only at the top. Again this is the wrong attitude: the top is only apparent in hindsight, when it is usually too late.

We should sell the stock when it reaches our price or valuation target, determined at the time of purchase. We (our emotions and false goals to be exact) are our biggest enemy when it comes to investing, and especially selling. Cassidy’s wonderful book has been written to fix this. Its objective is to recalibrate your mind and free you from the imprisonment of past decisions, to break you free from the buy-and-hold state of mind and turn you into a buy-and-sell investor.

Check out the entire post by Vitaly. It may give you some ideas for what books to buy as gifts for this Christmas season.