When to sell

14th Mar '22 by Muggles

4 comments 531 reads

TL:DR - what sell rules do you use?

Background

For the past few years, I've been running two portfolios. The first is my 'retirement' portfolio - buy and hold forever high yield shares that I try to buy when the market is in the midst of panic selling, and built mostly during the covid downturn. The second is my 'capital gains' portfolio - a higher risk strategy, based on stock ranks, aiming to make capital gains over the course of holding stocks for months to a year or two. The idea is simple - when times are good, make hay in the cap gains portfolio. When everyone is running for the hills, sell out and start picking up high yield shares over a few tranches without trying to time the bottom.

The tricky bit is turning out to be knowing when to sell, as this and the COVID downturn has taught me. I'm usually selling out half way down, and often needing to override my sell rules early to preserve capital for my retirement portfolio.

Cap gains buy rules

I'm still fine tuning, but generally:

Spread less than 300 bps
M rank greater than 90
Not highly speculative, microcap, or qualifying for any short screens
Net debt less than 3x operating profit
Buy the highest VM or QM shares, aiming for an even split between the two.
I don't have any hard rules in terms of sector, but avoid becoming too overweighted in any one sector, and be willing to go a few places down the list to get a share that meets the rules in a sector I don't often get exposure to.

Sell rules

Originally, my sell rule was M rank below 80, but I since upped it to 90. I also sell if I lose 20% or more on a share. So far, these rules seem to have been broadly correct. I keep a 'sell' portfolio where each sold share is 'bought' at the price I sold at and held for a year. Of these sells

3 lost 20% plus
6 lost 10% plus
9 gained less than 1%, and lost up to 10%
4 gained up to 10%
1 gained 12%
1 gained 25%

I call that 3 correct sells for every one incorrect sell (25% false positive rate), so I'm happy enough with that. However, that's not the whole story. Of my buys

4 had gains of 20%+2 had gains of more than 1%5 had gains of less than 1% or…

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doctor dave

15th Mar '22

This all seems really much too complicated. I would put it all in the PYAD-type buy and hold portfolio and top up your positions during downturns. The rest of your strategy looks like much too much speculative buying and selling incurring significant costs. When to sell is the hardest part of any investment portfolio strategy, and the ideal time is never.

KevinS1

This seems very complex. If you are after a rules based PF try looking at Rolands SIF portfolio - he publishes updates regularly and undertakes rule based changes as and when required. There is a lot of info on how his process works and the screens are all on the site ready to go.

I struggle with when to sell as well - 20% down is a cut-off certainly, although I still hold some in my PF that I haven't sold out of yet. Looking at SP x-ing the 200 day EMA is another one I see written about a lot, but probably buying and holding good quality companies isn't a bad idea and holding a little cash for the odd downturn wouldn't hurt.

I have also fallen for the cutting the flowers and watering the weeds in the past by selling large chunks (50%) of winners when they double in price - this might seem a good idea at the time, but winners often carry on winning so probably best not to (says he after doing this many times).

Buying into shares when they have upward momentum only and a rising RSI is also some good advice I have picked up and saves you buying into what look like good ideas, but a declining SP might continue however cheap it looks - another hard lesson I've learnt. Stan Weinsteins "profiting in a bull and bear market" gives some excellent advice around this topic.

A lot of these explains the current markets with war, inflation and uncertainty reducing liquidity, impacting long-term profits and generally making people sit on their hands waiting for more clarity. There might be some great opportunities/bargains out there, but is anyone sure where this market is going?

Best of luck.

willhampson

16th Mar '22

Hi, that looks very complicated to me but if it works for you and is a process that you are comfortable with then that is all that matters.

My sell process is quite simple. I have a sale target price in mind for every stock I buy which I keep in an Excel spreadsheet. I will sell if and when that price is reached in almost all circumstances; the only real exception might be an event that very materially changes the valuation to the upside. I target a 15-20% return so often my target price is pitched at a level below what I think the stock is actually worth. I have found that targeting that as a return and recycling those profits into the next target has worked well for me (i.e. 15-20% gains compounded over and over become large figures very quickly). An example would be Halfords (LON:HFD) that I have recently been buying in my SIPP around circa 250p. I think it is likely worth around 350p (and considerably more if bought out which I see as quite conceivable) but I have an exit price of 300p. I have no issue buying back later at higher levels if the particular stock still meets my buy criteria.

I don't use stop losses and wouldn't sell something just because it is dropping, particularly in a market where everything is being sold off like the last month. Obviously, if the story changes and/or there is a profit warning that looks terminal or the first of a few more then I would likely take the loss and move on. All the best, Will.

Guybrush

A few months ago, I briefly tested the Stockranks number as a trading indicator, similar to other indicators such as the MACD or RSI indicators. I droppped it almost immediately as it wasnt working for me. The reason why I think some indicators work is that they are widely used by traders. Due to the exclusive nature of Stockranks as part of Stockopedia, that limits its use and effectiveness as a trading indicator as few use it. Also, as Stockranks is a composite figure it's difficult to know which of its three parts(QVM) is responsible when the number drops or rises and to what extent. For example, if Value drops by 30 percent does that mean stockranks drops by 10 percent? If you knew the Stockranks formula you could work it out I suppose, but the formula isn't provided on the wesbite. I personally won't use an indicator if I don't understand it.

You could tabulate your results each month and see if your system is making profit in the long run. You want your average wins to be higher than your average losses. And you should avoid the big losses, as it only takes a few or one, to wipe you out. A system that does well for a few years than wipes you out is only good if you take your money and run after a good run, and never come back.

Based on chart patterns, I'll sell at 6/7 percent loss on each trade, no questions asked. The first loss is always the easiest to take. I've made that a habit now, and no longer need to think about it. Also, this loss is not the 6/7 percent of total equity as that would quickly lead to ruin, but 6/7 percent of a maximum 25 pecent stake per trade, which is about less than 2 percent risked of total equity. This will keep you in the game.

When to sell

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Muggles

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