What strategy do you use?

16th Jun '23 by gmtrader

10 comments 783 reads

I find over the last five years I have improved my strategy for buying into shares (and I am still improving). What I struggle with is when to sell. I either sell for a nice 30% profit, just to see the share go on and 10 bag, or I decide to hold and watch it retrace.

I understand there are many different styles to trade and it is better to stick to a plan.

Selling should be done on a share by share basis imo because every share is different, some being growth companies, others being steady and consistent, while others are pure speculation, moving 20-50% on no news but maybe just because they have been over sold and are cheap.

Like many investors, I like to buy a share that is cheap and seems like it is a bargain. PE is a great way to determine the value of a share, but it does depend a lot on which sector you are looking at. I believe Robbie Burns like a share with a PE of 12-20 ish. 12 being cheap, 20 and above being fair value or expensive, while below 12 could be an indication that something is not quite right with the company. ( please correct me if I am wrong here).

I do look at broker targets, which do seem to over estimate a target price.

So here is my strategy for selling:

CHEAP COMPANIES THAT ARE NON PROFIT MAKING - Sell all on a recent spike and maybe buy back later

CHEAP COMPANIES THAT ARE PROFIT MAKING AND SEEN AS A GROWTH COMPANY - Sell initial stake on a spike or if PE gets to around 20. Buy back initial stake if it drops back again.

STEADY AND RELIABLE COMPANIES, OFFERING A GOOD DIVIDEND -Sell initial stake and run profits on PE above 20-30 (depending on sector and average Pe the company runs at). Buy initial stake back later if it drops back.

As you will see, it is hard to categorise any particular company and that is why I say each company needs to be looked at on a individual basis making my rules for selling very broad.

So, as the title says, what strategies do you use and do you find they work for you?

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Benson212

16th Jun '23

To start with, you're not alone. Most investors have this problem but it can be resolved by having written down rules and having the discipline to stick to them. Reading your sell rules, to be frank, they are far too vague... What is your definition of "spike", for example? You also mention you will buy back when the share "drops back again", but to what level? What defines "a drop"?

I know it sounds a bit pedantic, but you have to be very clear with yourself. Otherwise every sell decision will be inconsistent with each other. If you're inconsistent with your decision making, you will be inconsistent in your returns - guaranteed.

Now in terms of my strategy, I am a momentum investor. I use the Momentum rank, in combination with an absolute trend template (inspired by Mark Minervini) and limit my buyable universe to small/mid caps. My screen is below:

https://www.stockopedia.com/sc...

I only buy when a stock is on this screen (max 10 positions), and I sell based on two criteria:
Sell when the Momentum rank falls below 90 and it's 50 day moving average.
Sell a stock when it falls below the 200day moving average, regardless of the momentum rank score.

I'm rigid with these rules. I don't have bias towards any one stock and I treat every stock with the same rule - this helps with consistency. This strategy has worked well for me, and I have achieved an 18% annualised rate of return over the last five years or so. However, this works well because it compliments my buying rules. i.e. I buy when there is momentum and sell when there is not. Your rules are a bit more ambiguous because you buy on fundamentals and valuation, but then sell on valuation and technicals (i.e. the spike), and then buy back on technicals (i.e. the drop) - it seems a bit messy.

I either sell for a nice 30% profit, just to see the share go on and 10 bag, or I decide to hold and watch it retrace.

Furthermore, this will always happen regardless of what rules you have in place. The point of rules are to give you consistency, remove emotion from your decision making and skew the probabilities of winning in your favour over the long run. They are not there to nail tops and bottoms - remember, there is a big difference between being right, and making money.

I know I sound a bit blunt, but I say it light-heartedly :) I hope this helps!

gmtrader

Thanks for your reply. I will look into your method. Your criticism is good as it makes me think a bit more. Thanks again.

ken mitchell

Good advice is to run our winners and sell our losers. We want portfolios where we are happy with every investment in it. And as soon as we’re not happy with an investment be it a winner or loser, then sell it.

So I sell only for investment reasons. E.g on profits warnings and disappointing trading updates, and NEVER EVER just because a share has hit a 30% or whatever profit.

You’ve hit the nail on the head when saying you’ve sold and then seen the share 10 bag, If an Investment is doing well and updates are good and beat expectations that share is far more likely to be a buy than a sell.

You’ve also watched shares you hold continue to retrace. Why were they retracing? If there’s no bad news to explain then it might be worth waiting for their next trading update. If it’s good, the share should recover. If it’s not good you now know why the share had been falling and know that it’s probably best to sell.

Also check what other shares in the sector are doing. If they are falling too then it’s not a major worry. But if a share we hold is falling while others in the sector are doing well that can often be a warning sign. Keep it simple. Far better than selling just because a share has hit a 20 or whatever PE ratio! e.g what if that Company then smashes expectations and profits soar. That would bring the PE down again!

If we buy winners there’s often the likelihood that the gains will continue. I hold some of my winners for multiple years, and the more so if they pay big and growing dividends. Nor do I sell just because a share has hit some arbitrary stop loss target. If that share was already cheap, and updates are good, it’s more likely to be a top up opportunity than a sell!

e.g just to give one example of where I didn’t do as I’ve suggested here. I bought Games Workshop (LON:GAW) just a few years ago for £4.60. For reasons I can’t remember I sold within a few weeks for a modest profit. Now the share price is over 20 times higher at over £100 AND GAW has paid dividends that are also multiples of that original £4.60 buy price! And just one of GAW’s extra special dividends was itself bigger than that £4.60 buy price too. So it would have been crazy to sell GAW just because it had achieved an arbitrary 30% or whatever gain and then watch it multi bag .

Just one multi bagger like GAW pays for a lot of and even all our losers! btw…my strategy too is to look to buy shares and Investment Truts when they look to be at bargain prices, And right now so many are cheap, and that’s reflected in some with extraordinarily big dividend yields. Some of my current holdings are paying dividends between 7% and 16% at current prices and some significantly more than that at my even lower but prices. I’ve no inclination to sell ant of them unless they cut the dividend or an update disappoint.

17th Jun '23

Thanks for your comment. Interesting to see another view on when to sell. I do wonder how many different ways people have with the idea of selling.

MattH

I buy on fundamentals and technicals and sell on technicals (mostly).
I never sell just because it’s gone up by a certain percentage. I always sell on a profit warning. I always have a stop loss on my initial purchase and aim for that to be 15% (sometimes I miss it and go lower, sometimes I’m out a bit earlier)
Once I have a winner, I usually watch the price action, particularly around the main moving averages, in my case 100 and 200 (as I prefer to hold for a longer time and don’t like to be at the screen all the time). If price moves below the 100 day and then starts trending below it (the 100 dma average is acting as resistance) the I may sell half or watch it like a hawk. Once the above happens with the 200dma I’m out. Sometimes that can be a big drop from the top so the 100dma can be better, but that’s life. Calling the top is often just luck. Exceptions will be if the whole market is tanking, then it might be best to just hold tight, but it really depends on your faith in the quality of your holdings.
There’s a little more I guess, the usually stage analysis stuff from Stan Weinstein but in reality not everything behaves perfectly.
If the fundamentals deteriorate, such as a high PE, I won’t sell if it’s still moving up and the technicals are good.
no system is perfect and everyone has to find what works for them. This has done me quite well. Sometimes I get it right, sometimes not. It got be out of Boohoo (LON:BOO) in July 2021 at 320p (on a large profit) so that was nice. I didn’t have a great year last year though as it got me out of things in a general downturn and I would’ve been better just sitting tight.
good luck!

Clive44

18th Jun '23

Thanks BH1991. Interesting and useful advice.

John LA

19th Jun '23

Thanks for this, very helpful for a novice like me

Indie

I had the aim of running the winners and selling the losers. Then I had my first single-bagger and had a dilemma - whether to keep it to run what I still saw as a winner, or sell all/part of it as it was now much larger than my other holdings and somewhat swamping the portfolio.

I would be interested to know if people are worried about having different-sized holdings. Would you rebalance or carry on regardless?

Really all depends on the company imo. It seems the most successful investors would de-risk and sell initial stake. That way if it drops back you’ve lost nothing and if it keeps going you carry on making money, albeit a smaller amount. Maybe look at charts and work out resistance level and see if it’s over bought. Check the PE level, has the broker targets been hit, does it keep beating forecasts? How risky is it, does it have high debt? So many factors to take into consideration. Grats though on doubling your money!

Thanks for the reply, gmtrader. Good advice.

I purposefully didn't put what happened next... the stock price fell back and I sold. I made 50%, which I was definitely happy with. Just wondering what to do should it happens again. It was Airtel Africa (LON:AAF), if anyone's wondering.

Selling rules definitely seem harder to put together than buying rules, so thank you for starting this thread - it's very useful to hear all the different ways of being right (we hope).

What strategy do you use?

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Gmtrader

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