When To Sell

I saw recently a X/Twitter post where a financial analyst was stating how much money Buffett “left on the table” by selling down his Apple stock. Let’s leave aside the tremendous amount of hindsight bias for the moment. That alone should disqualify this analyst’s assessment. 

This is yet another sign that the top may be near. Either way, accepting a 3 percent yield is not exactly a great reason to be invested at the moment. 

But the post does raise the ager old question - when is the best time to sell (and also when is the best time to buy but the principle holds).

Sell when the valuation is too high and move on. 

I’m fairly sure Warren Buffett is not lying awake at night dreaming of all the extra dollars he would have if he didn’t sell. The reason why is because as a seasoned investor, you come to realise that as the old saying goes - perfect is the enemy of good. More importantly, it doesn’t really matter so long as you made money.

We humans get trapped in time. We try to perfect every single moment. We agonise of timing the market down to the day or the week. This is completely unnecessary. The chances of you perfectly timing the selling of stock every single time over your investing career is near zero.

The way to think about selling is this. 

It’s avoiding losing money that matters. Make money and move on. 

Even allowing for a lower level of compounding, if you avoid losing money you will still do well and generally much better than a buy and hold type who suffers a 50% drawdown. And let me tell you - if you invest for 20 years, you will almost certainly suffer a 50% drawdown, thereby smashing your compounding rate. 

Let’s use the rule of 72.

If you compound at 7% with zero volatility (think bank account), it will take you roughly 10 years to double your money. If you start out at 10% with zero volatility then it’s 7.2 years to double. Now imagine suffering somewhere in those 10 years a 50% drawdown. This means your 10% compounding is actually compounding at 2%. You just can’t see it yet.

Start $100 at 10%. In the first year you suffer a 50% drawdown.

Second year starts at $50. Now at 10% for the remaining 9 years you end with $118. So $100 turns into $118 over a decade. So a return of roughly 2% compound over the 10 years even though you started out at 10%. We know valuation matter but now we also know that drawdowns matter too!

Ok, but what about a later drawdown of 50%, say in the final year.

Start at $100 and compound at 10% for 9 years. That’s $237. Now suffer a 50% drawdown in the final year. That leaves you with around $118. 

This is why investors suffer low long term returns. They forget that valuation matters and so by leaving your money exposed where valuations are high means you will most likely suffer a large drawdown at some stage. When is irrelevant. The point is the loss. 

So that’s a way to think about when you want to sell. Think about what it feels like to lose a lot more because you couldn’t bring yourself to sell as you thought you might “leave some profits on the table”. 

Buffett understands this. The maths should be your primary consideration. The 7% constant return doesn’t look so bad when you think about it in these terms. 

All stocks go up or down so you are likely to be disappointed anyway. Especially if you sell into momentum and you feel foolish as your stocks go higher. But at extreme valuations, those profits are most likely not there for the long term.   

It’s about avoiding losing money.

Have a systematic approach that avoids losses and makes money over time. 

No one times the market perfectly.