One of the great virtues of Stockopedia is its advocacy of a rules based system to select shares to buy, and its provision of a range of metrics that are proven over time to be successful. But how do you know whether its time to sell?

Roland Head wrote a couple of fascinating posts on this topic as part of his Stock in Focus series, here and here . I'm looking forward to seeing how these work over time. But I'm struck by the fact that, even as rational an investor as Roland tries to be, he's proposed rules that are based on personal judgement about what constitutes a sell signal. They look pretty sensible judgements, but do they really yield better performance than the alternative - do nothing?

How do you measure the effectiveness of your selling strategy?

I've been chewing on this problem for a while, as it requires the availability of information about what would have happened in an alternative reality. The one where you didn't sell, or sold less, or even bought more of the stock in question.

At least in principle, the effectiveness of a selling strategy must be that:

  • the return made on your alternative use of capital net of frictional costs exceeds the return you would have made had you done nothing.

But how to measure that in practice? Many people track the performance of shares that they have sold, though it isn't a topic that is shared on most of the discussion forums that I watch. However, even where an individual does so, it is unlikely to represent a statistically significant sample across different sectors, geographies and time periods. Terry Smith, Warren Buffett and other notable investors have a common approach: if they believe the company fundamentals remain strong, their holding period is indefinite. But if you are less confident in your judgement about what "fundamentals remain strong" actually means, what mechanical test can you put into place?

Why don't we backtest selling strategies the way we do buying strategies?

Its odd that we have so many backtested models out there that look at the effectiveness of which shares to buy, but few if any that look at whether and when to sell. I looked up on Investopedia and found a number of posts that talked about…

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