SIF Folio: A New Strategy For Selling Shares (part 1)

18th Nov '20 by Roland Head

45 comments 6019 reads

I want to become a better seller. I’m sure many of you will agree that choosing the right time to sell a share often seems harder than knowing when to buy it.

Indeed, I’d suggest that having a good strategy for buying but no clear process for selling is a common weakness among investors.

At a portfolio or fund level, there are two ways of making money from stocks. Firstly, you need to buy some winners. But equally importantly, you need to minimise the impact on your portfolio return from the inevitable losers.

Over the last year, I’ve tried to address the second of these requirements by introducing two new rules to the SIF folio:

These rules have already been put to the test, with good effect. After Centamin’s gold mining plans went awry recently, I sold the shares from SIF for a -27.5% loss. At the time of writing, CEY shares are down by more than 50% from my original purchase price.

Note: If you’re interested in understanding more about the statistical evidence supporting my profit warning rule, I’d strongly recommend Stockopedia’s The Profit Warning Survival Guide ebook. This provides excellent statistical evidence on the benefits of getting out quickly when trouble appears.

These new rules mean that my approach to selling losers has evolved considerably from my original approach of only selling after nine months, regardless of any running losses.

However, when it comes to selling profitable holdings, I haven’t really made any changes to my system since I launched SIF in April 2016.

What I do now: At present I sell shares after nine months if they no longer qualify for my SIF screen. This is the screen I use to select shares to buy. If stocks do still qualify for the SIF screen after nine months, then I keep them in the portfolio on a rolling one-month review.

This approach has certainly helped me to lock in some gains in the 4.5 years I’ve been running the portfolio. SIF is currently up by almost 30% (excluding dividends) since its inception in April 2016.

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SIF virtual fund at 16 November 2020 (Value at inception: £1m)

Including dividends, SIF is up by more than 40% since inception.

However, using my buying criteria…

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Breakout Trader

19th Nov '20

I follow the minervini / Zanger approach, which is all about timing your entry point (yes, you can time the market!).

Max stop loss 8% at entry.

Sell in chunks into strength. Current approach is broadly to sell a third or one half at 20%+, then trail the rest behind either the daily closes, the 8EMA or the 21EMA.

There is room for discretion based on news and how price is acting.

One thing is for sure - rules help. They help to take the 'decision making' and emotion out of trading / investing, and that's important.

Duncanmead

I am also interested in establishing a selling strategy (there are many options to consider in the posts below). However, I would like to encapsulate those rules into a screen, and then run that screen against my portfolio. But I can't find a way to do it! If I could add a portfolio name to the stock screener, that would work, or have a tool on the portfolio page to run the screen (as is available for individual stocks). This feels like a fairly basic requirement, so I'm sure that there must be a way to do this, but I can't find it. How do other people screen their current portfolio for sell signals?

The Phoenix

HI Breakout Trader couple of questions if ok, do you make your initial purchase all in one go or scale in over 3 or 4 for example ? and with the 8 & 21 EMA's are they daily or weekly ?

Thanks

Gromley

An interesting thread already here and reminds me that I am overdue an update on my personal when to sell experiment regarding Walker Greenbank (LON:WGB) - I will perhaps get on to that at the weekend.

Spoiler alert : I haven't sold & I am quite happy with that.

Really looking forward to part two of this post to see what Roland comes up with.

I note that most of the (adverse) results in Roland's spreadsheet pre-date the addition on the 25% stop loss rule, which might have cleaned up some of the bigger losers (but also might have messed up some better positions - no way to tell without looking at the points in between!)

I rather think though that maybe this thread should have been better named "A new strategy for holding"

As others have alluded to I think the answer as to when to sell or hold has got to be tailored to the reasons for buying, but I do agree that the "I would no longer buy it" test is overly harsh - if I only bought stocks where I thought there was a 20% upside available, I would see them as soon as they went up 5%!

JCPr

Amongst many of the mistakes I make I've found that the most expensive is a bad habit of selling rising shares too early. It's not so much that they've reached a price where I wouldn't buy any more but that they've recovered beyond what I've estimated as a fair price, so I've been selling only to watch them continue to go up. Looking at the Momentum factor and avoiding selling if they have high momentum has helped, but it is harder to track when the momentum starts to drop off (the day job is taking up a lot of time at the moment so my idea of downloading data on my portfolio every day and charting momentum keeps getting put on the back burner). It would be interesting to be able to show the history of the QVM factors on Stockopedia like the overall Stock Rank is shown, especially the Momentum rank.

That's a great point JCPr

For many investors the inability to watch the market all day or even as you say to commit to spend time updating every evening can be a real drawback and can derail otherwise potentially valid approaches.

I have been there and had those problems, Whilst I am largely 'immune' at the moment; a couple of potential projects I am looking at may well present the problem to me a afresh.

I think the answer comes from building you investment approach to match your ability to "staff" it - having an approach that may be theoretically sub-optimal is probably better than one that should be more efficient, but that you cannot execute.

This feels like something deserving of a fuller article , so I will go away and think about that rather than ramble on inanely now.

Just one passing thought though before I go, you suggest that it would be useful to be able to chart historic QVM components (I think this may actually be somewhere in Stocko's development roadmap) but given these components are all to some degree trailing measures, I am not totally sure how they would help you make better real time decisions & actions. Perhaps something that feeds into them would?

20th Nov '20

Hi Clarea,

I should clarify first that my strategy is based on buying into breakouts from consolidations (bases), or occasionally pullbacks to once of the key moving averages.

Typically I will buy all at once, as price moves through the 'pivot point'. But if there's something which is making me cautious (overall market conditions, or a high volume down day within the base), then I will use a half-size position and look to scale in if the trade is moving well.

I use the daily moving averages for guidance (8ema, 21ema and 50sma), but I will zoom out to the weekly to get more clarity on how price action is looking overall. But the core of my trading is on the daily.

Hope this helps.

mercury61

Based on what you wrote (interesting) Halfords (LON:HFD), would be a sell, yet from what i see here in Stocko it's a superstock SR 97 with growing buy analysts consensus and an SP rising. Be curious for your take on this one

Rusty2

It is also an easy way for market makers to pick up shares at a discount.

The prices are not guaranteed, you will often get a lower price or sometimes they won't be sold.

You can buy in but then you can get stopped out again. Does not make much sense to me, selling at a discount and then buying back in at a higher price.

They can take you out of big winners. I did a study on NAPS shares and some of the largest winners you would have been stopped out of if you had 12% stop loss.

john2

I don't rely on preset stop losses - I monitor my shares on a spreadsheet and execute the trades manually. As you say, it is possible to be stopped out at market open and have to buy back in again.

12% is a pretty tight stop loss. The Stockopedia investment club has the following system of stop losses -

12% for Conservative

15% for Balanced

20% for Adventurous

25% for Speculative

30% for Highly Speculative

When Stock Rank goes below 50.

Maung Tooe

maungtooe

12% is tight for some but wide for others, depends on the shares and how you are trading.

Recently I got stopped out of XP Power (LON:XPP), bought at 4592p, stop loss 3900p, price obtained 3753p, price fell to around 3500p and then bounced back up to around 3900p within an hour and is now 4400p. So I have lost about 20% because of the stop loss. If I had used 20% stop loss I would have lost even more, 25% maybe not got stopped out but it was close. XP Power (LON:XPP) is classed as Adventurous.

As I said above, I execute my trades manually after giving wild price swings time to settle.

That may work better if you can keep an eye on your shares, however with a profit warning or a negative RNS you will likely get a lower price than your automatic stop loss. That's about the only time stop loses have saved me.

So you are not really using stop losses, it similar to an alert system?

That's right. A few years ago I had to repurchase my shares in Compass (hardly a small cap) when an automatic stop loss kicked in at market open. They did not even fall on the day.

ManojMistry

Being mostly an income investor, my selling strategy is based primarily on yield. I buy based on intrinsic value and I calculate a buy range (for companies that I understand and believe have a great moat). If a price falls to that range, I buy more as long as the yield is within my target range (which it generally is if I am buying at my buy range and delivers a great yield on cost). The only time I sell is if the yield on current value drops significantly (dividend cut) and there is something very weak in the fundamentals of the business now and in its future (this is rare). I only really invest in 2-3 sectors and diversify within those sectors. I only hold between 5-10 companies in my portfolio, which gives me the bandwidth to dig deep and really understand the businesses that I am invested in. I allocate about 20% of my portfolio value to growth opportunities and my rule of thumb for those holdings is to sell once I have achieved a 30% return - taking 50% of the profits and pushing them into my income portfolio and the rest to allocate to new growth opportunities. If there are no growth opportunities or my income holdings are above the buy range, I park the profits in a Bond ETF until I find one.

Many thanks interesting the buying on breakout from bases this seems to be a common theme for entry points amongst traders with a good record.

From what you are saying would I be right in thinking if you looked at something as an example like ITV which has been breaking up you would wait for another base to form before entering or possibly the pullback to one of the ratio's you mentioned previously.

I'm trying to get my market timing better I guess what I'm trying to say is using this example if you were looking for the first time and the break out was already 10-12 % up on the last base would you wait or still jump in given it was say on a three month high ?

Regards Andy

FREng

23rd Nov '20

Roland

From the graph of SIF performance above, it seems that SIF was 40% up in July 2018 and has tracked the FTSE All Share since then. If that's right, do you have any explanation for the early outperformance and subsequent tracking?

Thanks for your response. It's the momentum or the quality dropping off that would be the main things I'd be looking for. As you say, just looking at the quality or momentum factors gives just a snapshot. It's very easy to spot the rate of change graphically.

I have in mind shares where I would delay my selling decisions until the momentum starts to decline rather than trying to apply the rule to all my holdings. Quality decline would be just an extra warning sign.

Robert Scoggins

24th Nov '20

Hello .

Congratulations on your progress thus far.

IMVHO , a stop-loss system is required based upon what percentage of your total

portfolio's value you are prepared to lose at any given time in any given stock .

Best wishes , Robert .

SIF Folio: A new strategy for selling shares (part 1)

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Roland Head

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