Shareowl: WHEN TO SELL AND WHEN NOT TO SELL

Tue May 30, 2006 - 23:30 Sin


WHEN TO SELL AND WHEN NOT TO SELL

I am glad that today, a forumer posed the question: When To Sell? This topic is usually discussed less than what to buy or when to buy. I have therefore decided to write this article by adapting from the forum postings of today on the thread, “When to Sell”.

Forumer’s Posting

Hi Prof

I just got to know about your site last week – going thru the pages, I know there are many things that I can learn from you and the other gurus.

I have been participating in the market for more than 15 years. I usually “buy”, wait a while (could be a few months or even years and then sell). In this slow way, I do end up with profits.

Many Books have advocated cutting your losses and riding your winners to maximise profits. On some occasions I have sold my shares, only to see it double from my selling price (it brings tears to my eyes!!)

I have looked around but have not been able to find anything substantial on “WHEN TO SELL”. Would really appreciate you sharing any golden rules on “WHEN TO SELL” (perhaps personal experience) Or are there any known theories on this matter?

Please everyone - share your thoughts!!!

Thank you and Cheers.

Provocateur’s Reply Posted on the Forum

My favourite investment guru authors are Philip Fisher and Peter Lynch. They give good guidance on when to sell.

I strongly recommend Fisher's classic book, Common Stocks and Uncommon Profits, first published in 1957 and republished several times, the latest in 1996 by Wiley Investment Classics with a new preface and introduction by his son, Kenneth Fisher. I bought mine from Kinokuniya. The book has a chapter titled"When to Sell and When Not To".

To summarise Fisher’s thinking on the subject, he said there are three, and three reasons only, for selling any shares:

1. When a mistake has been made in the original purchase and it becomes increasingly clear that the factual background of the particular company is, by a signficant margin, less favorable than originally believed. The proper handling of this type of situation is largely a matter of emotional self-control. To some degree, it also depends upon the investor's ability to be honest with himself or herself.

2. Sales should always be made of the stock of a company which, because of the changes resulting from the passage of time, no longer qualifies in regard to the fifteen points outlined in Chapter Three (please go and read them for yourself) to about the same degree it qualified at the time of purchase. This is why investors should constantly be on their guard. It explains why it is of such importance to keep at all times in close contact with the affairs of companies whose shares are held. ... Either there has been a deterioration of management, or the company no longer has the prospect of increasing the markets for its product in the way it formerly did.

3. If an investor has had funds for invesment for quite a period of time ..., he may well place some or all of them in a well-run company which he believes has definite growth prospects. .... If the evidence is clear-cut and investor feels quite sure of his ground, it will ... probably pay him handsomely to switch into the situation with seemingly better prospects.

Well, there is nothing like reading Fisher's entire book for yourself. For a start would members like to brainstorm and suggest some SGX-listed companies that fall into each of the above 3 categories.

Fisher also has good advice on when not to sell. That includes the seeming onset of a bear market and you are holding an uncommon stock. After the bear market is over and the next bull run comes, the new peak will be much higher than the former peak. In such a case, if I interpret him correctly, it pays to buy some more of the stock in a bear market. This needs lots of patience of course and many investors, including myself don't have very much of it. But this point of holding a good stock through very long bear market is debatable. What do you all think. Please cite some examples.

Provocateur’s Second Posting on the same day

As for specific situations recently, please see the recent threads on Capital Land and STX-Pan Ocean. I provoked one member to sell his STX-Pan Ocean when it was trading at 69 cents and he had already lost 20%. He did and is now very happy with having done it. STX's industry (container and bulk shipping) was only at the start of the current cycle of falling revenues and profits due to huge excess capacity.

As for CapLand, in the thread I mentioned that I had sold out at $4.94 partly because of sell calls from Daiwa and a Western investment house but largely because of its increasing risks in China and high valuation even if they were to win at least one Integrated Resort project. See, today it is trading at just above $4 and I don't think it is time to buy yet. Just my own personal provocative opinion.

As for when not to sell, the best illustration is Jardine Cycle & Carriage. Indonesian car sales may have slumped since September 2005 but car sales will go up again sooner or later. With the Toyota agency for Indonesia's 240m people and their increasing market share despite the slump speaks for itself. Those who sell now at $10 will certainly regret it. Just hold for next 10 years but keep your eyes and ears open for any changes in management or product or market.

Cheers

Provocateur (Sebastian Chong)

May 30, 2006