IT'S WHEN YOU SELL THAT COUNTS!
OVERCOMING BARRIERS TO PROFIT
a presentation for
Mississippi Society of Financial Analysts
Members and Guests Wednesday, April 21,2004
by
Donald Cassidy Senior Research Analyst, Lipper Inc.
And author of...
Trading on Volume It's When you Sell that Counts! When the Dow Breaks 30 Strategies for High-Profit Investment Success
P.O. Box 1222 Denver CO 802011222 E'mail: [email protected]
While the speaker is identified with Lipper Inc., a Reuters Company, the statements contained herein and associated opinions provided orally are those of the speaker personally and do not necessarily represent positions of Lipper Inc., nor of its parent firm, Reuters Group pic. Neither Lipper nor Reuters makes investment recommendations.
The Problems Inherent in Blind Buy-and Hold
Assumes an unchanging world Passivity allows wealth destruction Never seize advantages; only be a victim of disasters Practices an "If you can't be perfect, do nothing" approach A convenient mantra for some parties at interest plays to procrastination; decision-stress avoidance; tax aversion; fatalism BEGS THE QUESTION: Buy and Hold WHAT?
Deterrents to All Selling: Must Identify and Overcome
External Influences in the Environment Media mantra plays to tax aversion B&H "education" by parties at interest who don't walk the walk Rising L-T trend argues for "hold" Pressure to avoid mistakes (closure ends hope) Absence of assistance; brokerages focus on buy advice Fits our non-judgmental, rounded-corners culture
Deterrents to All Selling: Must Identify and Overcome
Drivers and Blocks in Human Psychology Perfectionism Endowment Effect Cognitive Dissonance Implications of disloyalty Avoidance of decision stress Closure avoidance "Devil You Know" Finality of divorces, executions, firings "The one that got away"
Hindrances to Selling Well: Identify and Overcome
In a bull market, analysts' raised targets give comfort to holding Suspicion of brokers' switch recommendations Volatility pushes wrong buttons Intuitive contradiction of selling on good news We always know well the reasons market or stock is up (or down) Comfort-seeking tactics = HH/SL Discern between scary market vs. company news
How to Sell: A "Do" List
Give up on being perfect! Investing is an ART, not a Science. Watch behavioral signs of a high market; metrics are never the same Use an asset-allocation discipline to force selling high Assume change, not its absence! Sell on fundamental or technical analysis, whichever speaks first Have a selling plan when you buy (prevents drifting) Spend equal thinking time on selling vs on buying
How to Sell: A "Do" List
Accept unreasonable returns graciously Sell crescendos (understand crowd supply/demand math) Sell spikes immediately (understand Internet's compression effect) Date, don't marry, your favorite stocks Enter target sell orders based on P-S-T Believe the "cockroach theory" Place stops based on chart patterns, not at arbitrary % down Always sell popular stocks before EPS reporting date Keep a notebook on yourself!
How Not to Sell: A "Don't" List
Don't confuse the stock with the company Don't fantasize that your cost price is important to the market Don't let gains get so large that taxes become a factor Don't sell good stocks because/when market scares you Don't sell at market at the opening on bad news Don't fall to the temptation of 'one more day' or 'one more
How Not to Sell: A "Don't" List
Don't procrastinate or rationalize Don't view selling as a permanent verdict Don't let taxes or commissions Interfere Don't pull or lower your stop orders If you use stops Don't forget key market mechanisms: $5 and $3 levels for marginabillty; $1 for de-listing
The acid-test question:
WYBIT?
Things To Take Away If you cant sell, you are a collector doomed to die with current holdings (maybe plus later buys) Selling should get equal "thinking time" with buying Purge Perfectionism! There are no "average sellers"; people either do it well or do it badly
Things To Take Away Remember that taxes/commissions are a LOT smaller than potential gains and losses The lower cap-gains rate is a pleasant bonus, not a basic human entitlement! Don't sell a stock because the general market has you scared Holding = Passive Buying. Therefore ask "Would I buy this today?" Holding should be considered a choice, not a default
Suggested Reading
When to Sell
It Was a Very Good Year
Martin S. Fridson Donald I. Rogers W.G. Bretz Justin Marnis and Robert Mamis
How Not to Buy a Common Stock Juncture Recognition in the Stock Market Value Averaging
Michael E. Edelson
Stock Market Probability Joseph E. Murphy
A 12-Step Program for Hold-Aholics
1. I have lost money even though I have not sold the stock yet. 2. It is impossible for me, or anyone, to be right every time. If I ' m wrong, I can buy it back later. 3. I will never sell at the high; I must abandon that fantasy. 4. I will not let taxes or commissions rule my decisions; lower longterm capital gains rates are a bonus, not a birth right. 5. Selling is neither a lifetime decision nor an insult to the company. The stock has no feelings and does not care what I do. 6. When, considering holding, I must ask if I would now BUY the stock, if I did not already own it. 7. The market is much more powerful than I am; it very often knows more than I do. 8. Companies in trouble take YEARS to get fixed. Many will die first. 9. Fundamentals rule only in the long term; opinion and emotion set prices most often. 10. P/E ratios cannot expand for long; they revert to the mean. Markets rarely rise more than 3 years, 4 months, 5 weeks, or 6 days running. 11. The record high price, the highest since I bought, and my cost price are irrelevant information. 12. Selling short is neither immoral nor anti-American. Prices fall faster than they rise. - Don Cassidy (AAII) in collaboration with Prof. Tom Howard (U. of Denver)
