Stock Picks | The Challenges Of A Newbie - When To Sell?

10th Sep '19 by kennzo2020

21 comments 1523 reads

Forgive my simplistic questioning, as I am relatively new to investing, but I hope through my questions and subsequent responses/guidance that myself and others can learn.

When to sell:

Through books, online reading, and guru's near and far I have some basic guidelines I try to follow when deciding when to sell a stock. I appreciate there are perhaps more complex, and better, ways to develop guidelines which I welcome, but for the time being my simplistic approach is the following.

If I'm in profit
I tend to generally stick to the rule of selling at around 20%+ on gains, though I am starting to develop a more methodical approach of looking to have some form of trailing stop approach to maximise profits whilst protecting losses

If I'm in a loss
Yes, the bigger challenge is in investments that are under-performing. I try to stick hard and ruthless to the process of killing anything that shows more than 10% loss, but where I find this difficult is in stocks that have good fundamentals, strong cash flow, profits, no debt but still under-performing. Here I try to be more lenient, yet hand on heart know this is wrong. A good example would be Character (CCT), I'm probably about 15% down on this one, but with strong fundamentals, and a Stockrank at 92 it's a tough one.
My question is not advice on whether or not I should sell CCT, but about when it's right to break your rules because elements such as a stockrank or fundamentals say so?

I welcome your guidance, feedback and thoughts.

Thank you

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kennzo2020

10th Sep '19

Thank you Gromley.

Carcosa

11th Sep '19

When to sell should be based on why you bought and not based purely on the share price. If you bought based on some financial ratio e.g. PE or perhaps some 'story' e.g.a company selling off a division or a purpose e.g. High Yield Portfolio or a style e.g. mechanical then occasionally review your holding to see if the reason you bought is still evident. If it is then continue holding. If the reason to buy has evaporated then sell. Essentially ignore the share price.

As for selling when 20% in profit... well, that's a bit arbitrary isn't it? Why sell something that is in profit purely because the share price has risen? Makes no sense to me. Never has. I cannot think of any serious investor applying that rule.

I agree with Gromley about selling based on Stockranks. After all Stockranks is essentially a tool to increase your probability of making a profit and for that to work you really need a relatively large portfolio because, say, 1 out of five shares will lose you money based on Stockranks.

As for your specific query on CCT, the share price suffered as a result of a very likely event that will happen in the future. Could it be foreseen? Probably not that exact event but a read of the Annual Report would have identified the risk. Given that, you can construct a forecast of the realistic expectation in 2-5 years and see if it is something you want to own; which brings me to another facet of buy/selling criteria. How long do you expect to be invested when you buy a share. Short term holdings as an investment style rarely rarely end up being a winning strategy. Personally my expectations are a minimum of one year but more often than not end up being 3-5 years.

One piece of research that Stockopedia published a while ago was that of profit warnings and share price performance thereafter. I know religiously apply the rule of selling immediately on the day of the profit warning. I know that the likes of Paul Scott has often tried to justify remaining in a share if the profit warning is 'temporary' but experience is plain to see that is wrong. Applying that rule of selling on a profit warning would have saved over 30% in losses had it been applied toward CCT.

As regards you 10% rule. I can guarantee that as a strategy that will cause you to make a loss, particularly when limiting the upside to 20%

So, in summary. Forget the share price. Re-evaluate your holdings on a regular (quarterly) basis to ascertain in the reason you bought it remains valid. If you find yourself consistently loosing then re-evaluate your analysis/research as therein lies the problem.

Investor & Trader

Not sure I agree, there are so many variables in the style of investing/trading that a definitive answer of when to sell is very subjective.
for example a 10% stop loss and a 20% profit gives a 2:1 risk reward, a 40% strike rate would make you a very wealthy man.

Its all down to style, timeframe and risk profile.

Snoo

Really depends on what basis you are buying and selling shares.

If it's on technicals or momentum based, then having that kind of 10% loss, 20% profit targets are fairly sensible. People like Naked Trader have stops and targets in this way I think.

Problem is when reading lots of approaches it is easy to try and take different aspects of fundamental/technical trading systems, and it does not work in my own experience.

In my view the over-riding rule is what you consider the intrinsic value of the share to be. Trouble is this is a subjective measure and will depend on your own calculations. But at least this provides a reference point for a definitive price at when you can sell. As results come out, these estimate prices can change. So for example on my most successful holding (Sylvania Platinum) my own target price has increased a couple of times and is always ahead of the current SP.

It would have been disastrous if I had cut that at 20%, or even 50%, as that paper gain on its own outbalances all the paper losses on my other holdings.

Perhaps a weakness in this is when it comes to sell. I only purchase shares where there is a decent premium from the current price to the intrinsic value, but the intrinsic value is only my own guess, and I could be utterly wrong. I update prices as more information becomes available but some cognitive bias may slip in.

So for example, with something like 888 I have revised my opinion and the target price will result in a loss. Same goes for Somero, but I am not selling now because the price isn't what I think it is fair. While this is still prone to emotions, it does underline to me that when you sell, the price you paid is largely irrelevant.

My own view is that one of the few advantages as private investors is that we can hold losses.... institutions may come under pressure and be forced sellers like Woodford. It is always uncomfortable that some share prices slide on no news at all (and therefore my estimates remain unchanged) but I say to myself that on some occasions the market is trying to squeeze you out for others to gain (obviously on other occasions the bad news will be forthcoming).

deeplyconfused

If you looking at exit strategies I highly recommend Super Trader by Van K Tharp.

CCT is down on the news that they are likely going to lose the license for Peppa Pig, which makes up a very good portion of their profits. The Stockrank wouldn't take the likely fall in revenues and profits into account.

andrea34

Here are some random thoughts that I hope will help you:

A stop loss of 10% is really quite tight, unless you are investing a chunk of cash and your fees are very low. It also depends on the spread (how far apart the buy and sell prices are), for example Best Of The Best (LON:BOTB) has such a huge spread that you might be stopped out on a small movement in the price.
I do use stop losses, but to make them really function you must formulate them in relation to the highest selling price that each stock has achieved. You should also factor in some volatility coefficient - so, for example, a 12% stop loss on a FTSE-100 stock is reasonable, but to apply it to a small minnow would be crazy, and in this case something like 20% or even 25% would be more suitable.
Ideally, and this is harder to achieve, you should compare the movement of a stock to the market as a whole, and perhaps the sector that it's in. So if for example there is a stock market meltdown after the latest Tweet from that lunatic Trump and over a period of three days the markets drop 8% and your stock has dropped 7%, then compared to the market you are doing well.
Should you sell if a stop loss is broken but there is no news? In this example, I would more closely monitor such a holding and red flag the holding, and if it continues to drop then consider selling. Remember, the market often knows more than the news that is out there, just look at how often a share price rises or falls just before a results announcement! You say you are a Newbie, I would say by implication this means that there are a lot of investors out there who know more about the markets and the way they operate than you do. And me too... and I have been investing for more than 25 years!
If there is a trading or profit warning then I feel one should strongly consider selling! If this occurs, watch the market reaction over the period of an hour or so, there will nearly always be a dead cat bounce when bargain hunters are fishing, but then if/when the downtrend resumes then in my mind this is a strong indication to sell. If you're an accountant, then perhaps you can analyse the announcement and determine how fixable the situation is. If a warning announcement includes a statement about banking covenants, then I would be running for the exit. Remember, profit warnings are often followed by more bad news!
If a company's share price is falling, don't ask yourself so much why you bought it to start with BUT would you still buy it today! If you wouldn't, then why would you still hold it?

To take your holding of Character (LON:CCT) specifically, I of course cannot advise you on what to do. But in this case, there IS a specific reason on why the share price is falling, and that is that the Peppa Pig license is up for renewal in two years and due to the Hasbro takeover activity then this may not happen and investors fear that approx 20% of revenue and profit will just vanish. In reality, this may not happen, the license could be renewed (though I'm not optimistic) and they could create one or more new characters / products that will make up for all this. At this stage, the rating is looking very low and would seem to take account of this bad news, so it might be a bit late to sell now... but then look at the price chart for the past week, it is continuing to go down... and do you know when it will stop?

A P/E of less than 8 looks attractive, as does a yield of 6.59%... but if earnings do fall then these numbers are meaningless. (I don't hold).

All of my above comments are based on when to sell based on when a company's price is falling and/or when bad news has been announced. What about when a stock has shown a good rise in price to, say, your figure of 20% profit? In relation to 20%, I don't know why anyone would sell once 20% profit is achieved IF the price is still going up! In my mind, the time to ponder when to sell on a rise is when the rise has stopped and has stagnated - what I typically do is top-slice and sell about half of the holding, and let the remainder play and monitor what it does.

A final piece of advice is to use charts if you don't already! I have more recently learnt that this is SO important. If the chart is looking bullish then why would you sell? And if there is a clear, and ongoing, downtrend, then why do you think it is going to stop.

Oh, and a very final piece of advice which is a new criteria I am thinking of factoring in - watch what the larger trades are doing. If a very small investor (like me) is investing a few hundred pounds in an individual stock this means little to the overall picture, observe what trades of £10,000+ are doing.

Thank you all very helpful.

EssexBoy

12th Sep '19

The most important thing - is to develop rules and keep to them.

In all cases, it assumes (1) fundamentals were good, and (2) you bought at the ‘right’ price.

When to sell - made profit. Some say set a target. I prefer to watch the graph of the individual stock. If it is rising steadily, despite a few pull backs, why sell at an arbitrary +20%? Watch for signs of stress e.g. gapping up and watch Volume.

When to sell - made Loss: depends on your style, but a loss of 15% needs a rise of 17.6%+ just to get back. Minervini says 8% on the basis you can always buy back in later; but that is only one view.

Fully agree

shipoffrogs

Is selling at +20% and -10% going to work?

You'll be busy, incur high transaction costs and you'll never run a winner.

Again it depends.

If you have stocks that have a low volatility (ATR) prior to a breakout, with the trend etc and place the stop within the structure of the market near support, the chances of hitting the stop loss of 10% is reduced, if you trade US stocks for example with very low spreads transactions costs are much more manageable.

And yes a 20% profit against a 10% loss (2:1 ratio) at a 40% strike rate will make you very wealthy. (assuming you have enough volume for these stats to materialise)

However, I would not limit it to a 20% profit I would go with the structure of the market, raise the stop loss and try to achieve more.

My long term results are based on this approach - My average loss is 5.85% and my average win is 23.66% - holding a strike rate 59% BUT there are periods of only a 25% strike rate and this is where money management and position sizing earn their crust.

smegster

13th Sep '19

I would agree with Shipoffrogs and with Warren Buffett who said "The advice ‘you never go broke taking a profit’ is foolish".

When you sell a good company, with a strong moat and strong growth prospects for a miserly +20% profit, you are in-fact missing out on the potential for +1000% profits.

You only need one or two multbaggers in your portfolio to do wonders for your returns

Mike888

I would never use a fixed % stop or profit take, primarily because it's simply a number based upon nothing tangible, ie neither fundamentals or technicals.

It's hard to provide rules for others as investing styles differ so greatly, timeframes and risk appetite too. A contrarians perspective will differ wildly to a momentum trader for example.

There are however very simple rules that invariably beat the market, and these align to both fundamental analysis (ie pick a good company) and some basic technical analysis (when to dip your toe). I'm a firm believer in this as it saved me from disaster and I beat the market comfortably each year. However, there is an investment in my time to achieve it, it is far from passive and much closer to trading than investing, so won't suit many people.

If I shared my system I am very aware that there would probably be more distractors than supports of it, then you end up spending countless hours defending and proving it, time better spent just getting on with it. But in the spirit of sharing, simply pick a good stock, sit on your hands until the market tells you to buy, even if it is on face value ludicrously cheap (the market may know more than you). Then wait for the market to tell you to sell it, even if it looks like the fundamentals suggest there is more to come (again the market may know more than you). TBH though, whether the market knows more or not, it sets the price, so stop arguing with it.

There will be a ton of investors which will react negatively to this, typically value, and contrarian types, and that's fine, they are seeking outcomes over different time periods. I am seeking returns now, my holdings are typically measured in months and at times days, very rarely do I hold a stock for more than a year.

The approach does limit my investment universe, I need liquidity and stable stocks, volatility and lack of nimbleness would sink my ship.

I agree, my system seems to be closely aligned to yours in principle.
I use a weekly chart and fundamentals which I believe is the sweet spot

14th Sep '19

My trade costs are low, so that's not really a concern for me.

Very interesting Mike, and perhaps closer to my own style that I am developing - please share more if you feel comfortable to do so.

15th Sep '19

it would be hard to condense, however the technique is broadly as follows :

Technically I use SMA's, support and resistence, I'm not a big fan of patterns. I use daily charts but keep my eye on weekly ones too. Entry and exists rely heavily on the interaction of SMA's and where the price is relatively to them. Proximity to support or resistence keeps me out of the market until breached unless I'm trading a channel.

I will only trade long on a stock that meets my quality criteria, ditto criteria for shorts too. This tends to be a combo of financial statements, quality growth prospects and no single points of failure, eg Peppa and the lack of IP would keep me out of Character Group. Once a stock hits fair price by my reckoning it's on borrowed time, the slightest twitch on technicals and I'm out.

The stocks I hold for a few days are the ones I get wrong, generally they had a good story but for whatever reason they end up going the wrong way, so I'm out quickly, usually a loss of no more than a couple of percent. The ones I choose correctly I hang onto until my rules say sell, I achieve good returns on these.

My hit rate is probably around 70%, so it's important to drop the 30% as quickly as possible. Invariably my poor selections make ground sometime later, and that is the point I would buy them again.

Itworks like clockwork for me, it's rules based and I never override the rules. They are better predictors of outcome than my emotions and have taken many years of pain to get right. The downside is you need to be continually on top of the market, you can't take the day off.

I should set your exit price/criteria before entering the trade. Every trade should be based on a risk/reward assessment, and you're best placed to judge your exit before you have skin in the game.

Ken Lowes

17th Sep '19

First question to ask yourself is would I buy the stock now if not why not and sell. Second question is if you set, at 10% exit how come you are holding character at a 15% loss, that’s discipline and finally when you find-the answer to your question let us all know because we ask it of ourselves over and over, if you have a rule stick to it you may be a newbie but your theories may be better than mine and I am far from being a newbie. My first question when I joined Stockopedia was when to sell???? Never did get an answer! Sell too early you could lose a substantial upside, sell too late and it could be very costly. Find a rule that you are happy with or read Systematic Trading by Robert Carver, Good luck but remember the market makes fools of us all so take in the bigger picture as a first step. NO ONE SAYS YOU HAVE TO INVEST.

The Phoenix

23rd Sep '19

Interesting stuff Carcosa I completely concur with you sold out of Somero Enterprises Inc (LON:SOM) today at a 30% loss if I had bitten the bullet and got out on the previous warning where the rain was blamed for slowdown in orders I would have been a lot richer.

I also then did one average down after the first profit warning in hindsight another dumb move I'm beginning to think its safer avoiding all sub 200 mil aim stocks there generally so illquid any profit warning pushes them further to the downside due to minimal market depth.

Regards

Andy

The challenges of a Newbie - When to sell?

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Kennzo2020

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