The Timeless Question: To sell or not to sell

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July 9, 2009 | SIN Picks | | Author Asif

I received a question from a subscriber earlier this week that resonated with another question I received from a subscriber shortly after I sold one-half of our position in Indian mining company Sterlite Industries (SLT) for a gain of 95.12% a couple of months ago. Both these questions were related to the trading axiom “Let your winners run but cut your losses quickly”. In the eyes of both these subscribers I had violated this axiom.

The subscriber who wrote to me about Sterlite Industries and Tata Motors (TTM), wanted to know if I felt any seller’s remorse after selling 100% of my position in Tata Motors and 50% of my position in Sterlite right before a rally in Indian stocks that saw Sterlite’s stock move up to $11.57 just days after I sold it for $9.19. He was quite clearly referring to the “Let your winners run..” part of the trading rule of thumb I mentioned above.

While I did feel some amount of seller’s remorse at selling half my position in Sterlite, years of experience have taught me that I am usually much better off taking profits (or losses) periodically based on a combination of company fundamentals, sector fundamentals and sentiment (fear like we had few months ago when I purchased Sterlite and euphoria at the time I sold it). I finally sold the second half of my position in Sterlite last week for a gain of 167% as mentioned in the July 2009 investment newsletter.

I pointed the subscriber to a comment that someone left at the bottom of this article that Seeking Alpha republished from the SINLetter blog entry Taking Profits in Umpqua Holdings. Oregon based regional bank Umpqua Holdings (UMPQ) was trading at $16.47 when I sold it for a gain of 35.78% and had appreciated by, get this, 56 cents to $17.03 when the commenter made the statement “Missed out on that one, huh? Oh ye of little faith! Expect money to continue into this stable, divi-paying player”. The stock went on to hit a high of $19 before crashing to its current price of $7.62. Given that the company cut its dividend to 5 cents per quarter and the stock is now available for less than half our selling price, I am not exactly certain who missed out.

Something similar occurred back in mid-2006 when I sold weight loss company Medifast (MED) for gains of over 230%. Had I held off on selling Medifast, I would have seen those gains cut in half at Medifast’s current price of $10.04. At one point last November, Medifast dipped down to $3.52. Even investors who are just starting out realize that “buy low and sell high” is a myth as it is neither possible to consistently get in at the absolute bottom or sell at the exact top. If you get a chance to sell at a decent profit based on sound fundamental and/or sentiment related reasons, taking some money off the table is not a bad idea.

If I have a weakness, it is not selling my losing positions soon enough. This was the subject of the question I received from another subscriber earlier this week who wanted to know why I do not use some sort of loss limiting strategy to eliminate stocks that have dropped 25 to 30% and preserve the capital to invest in other stocks that could turn out to be winners.

Using stop losses or monitoring a position so that you get out if the position drops by a certain percentage is a very good strategy. I used to be more nimble in the past and at one point sold Brazilian aircraft company Embraer (ERJ) and healthcare service provider Unitedhealth Group (UNH) for small losses when the underlying business fundamentals changed. Both companies eventually went on to lose more than half their value.

Unfortunately during this bear market, which has been characterized by high volatility and 900 point swings in the Dow in a single day, I have not stayed on top of taking losses in positions. I did close out losing positions like ETF provider WisdomTree Investments (WSDT.PK) and Barclays Bank (BCS) but as is often the case Barclays appreciated right after I sold and the loss on Barclays right now would have been much lower had I held on.

It was Warren Buffett who once said something to the effect “If you can’t handle your investment dropping by 50%, you should not be investing”. In a market like this, selling a position just because it has dropped 50% makes little sense. I am constantly evaluating each position in the SINLetter model portfolio and continue to have confidence in most of them. The two that I will most likely sell in the near future are Textron (TXT) and Blockbuster (BBI) as both of them have dropped precipitously and it is unlikely they will recover to the levels we bought them at.

Overall my outlook remains bearish at this point as mentioned in the July investment newsletter. If you have not had a chance to read the latest installment of gloom by Nouriel Roubini (also fondly known as Dr. Doom), you can check it out in the Forbes article titled Brown Manure, Not Green Shoots. It looks like UC Berkeley professor and former Secretary of Labor Robert Reich shares Dr. Doom’s gloomy outlook. I started my first short position since late 2008 in the form of put options in the Special Reports Portfolio on June 18 and added to those puts in my personal portfolio a week later.

I continue to look for both long and short opportunities but at this point sitting still and letting your investments play out like the speculator Jesse Livermore suggested might be the best idea.

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