Rather than focusing too much on when to sell, you’ll likely improve your results if you adhere to sound portfolio-planning principles.
Knowing when to sell is perhaps the most pitfall-riddled aspect of investing. It’s a skill that nobody ever masters. However, real-estate investors have an old and valuable adage: You make your profit when you buy. You can say something like that about investing in stocks, because portfolio planning can overcome a lack of selling skill.
Investors we know have claimed to make small gains in many stocks over the years, but nothing to cover their losses. When we’ve talked to them a bit further, we’ve found that they’ve frequently sold stocks that went up for small profits, and have held on to those that went down, for big losses.
Filtering out your profit
This is an excellent way to filter all the profit out of your investments. If you sell what goes up, you’ll never have a big winner—and you need a few big winners, to cover your inevitable losses. In fact, one highly successful investor we knew long ago once summed up a great deal of investment wisdom for us, when he explained his success with the offhand comment that, “I was smart enough to buy Canadian Tire at $0.50, and too stupid to sell when it hit $2.” Today, of course, the stock trades for about $145.
The key to success for most investors is to build a balanced, diversified portfolio of high-quality investments. We try to simplify this task with our list of Key Stocks. These are the stocks that deserve to be the cornerstones of your portfolio. We do analyze and recommend other stocks in The Investment Reporter, of course. But the Keys should make up most of your investments.
We also advise investors to rely as little as possible on market timing and predictions of market trends. Instead, pick out a list of high-quality stocks that are right for you — stocks that fit your investment goals and your temperament. Then, buy them gradually, over a period of years.
Rather than do that, many investors bunch their buying into concentrated periods. Bunching your buys can, of course, pay off, it you happen to buy at a market low. But when you buy at times when most stocks are trading at their highs, such a strategy can easily backfire.
Hindsight is perfect
With the aid of hindsight, it’s always easy to see which stocks ‘should’ have been sold, and when. But nobody (least of all us) has a buy-sell record that measures up to hindsight.
Not only that, but consider that a buy, hold or sell recommendation does not necessarily apply to all investors. Take, for example, our Marpep Quality ratings. Over the years, we’ve lowered the ratings on a few of our Keys as problems with them emerged. Such actions don’t amount to a sell recommendation. But suppose your circumstances and objectives are such that you should only own stocks we rate as ‘Very Conservative’ or ‘Conservative’. If we lower our rating on one of your holdings to ‘Speculative’—or even to ‘Average’—then you should sell, regardless of our buy-sell-hold advice.
Our Keys have an attractive, even extraordinary long-term record. But few investors can buy all of them. Choose from them randomly and you might get lucky. But your luck is apt to improve in tune with the effort you put into your search. You’re most likely to profit if you follow our portfolio advice, as well as our buy recommendations. Choose stocks whose Quality ratings match the risk you are willing to accept. Diversify among the five main sectors of the economy — finance, utilities, manufacturing, resources and the consumer sector. Balance your portfolio between current market favourites, and stocks that are out of favour.
Our recommendations, even our Keys, are bound to include a few losers. But most readers find that when they follow all our advice, they also come up with some winners. This limits their losses when the market is weak, and puts them in a position to profit when prices turn upward, as they inevitably do.
This is an edited version of an article that was originally published for subscribers in the February 7, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
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The Investment Reporter •3/26/20 •