Saturday, 23 July 2016

How Do I Decide To Sell

Personally I am faced with less problems when buying a share, compared to selling. As shared in an earlier post, I try to buy at a price so low that I do not have to worry about selling.

However, it does not mean that you are spared from the mental struggle or sense of uncertainty experienced when you try to sell. Kim Iskyan discussed about “Stockholm Syndrome” in this article, which is basically a buyer-remorse condition where one  questions himself whether the purchase was a right decision, and whether the buying could have been executed better, after the purchase.

I don’t usually experience the Stockholm Syndrome. Not that I am expert at valuing a company, or I have some divine ability to always buy at the rock bottom price. It is because I do not look at the share price often after I buy, hence do not have much opportunity to experience the buyer remorse. Also mentioned before, I intentionally not check the share price frequently, and instead just have a sense on the STI level to quench my thirst of knowing the share price.

But selling, it’s a totally different ball game. The uncertainty comes from different dimensions:
  • From purely a fundamental investing perspective – has the share reached its fair value?
  •  From a technical investing perspective – does the share price has further momentum to rise?
  • From a portfolio management perspective – is the counter occupying too big a portion in my portfolio?
  • From an investing psychology perspective – will it rise further after I sell? What if it still has another 80% upside and I miss it?
Fundamental Investing Perspective
While the share price has reached its fair value, one has to re-visit the fair value again relative to the duration between his buying and selling decision. If few years had passed, has there been positive growth that warrants the increase in fair value? Is there a need for the fair value to be raised?

Also, no matter how extensive or in-depth one’s calculation on the fair value is, there can never be 100% accuracy. It would at best be a narrow price range, and how wide the range should be is up to individual’s comfort level. So, with a range of price, it makes determining what price to sell at trickier.

Without mentioning, all other ratios and company growth are important considerations too.

Technical Investing Perspective
We look at technical indicators to figure out if the price will go higher. Is it poised to break the resistance? Is the MA showing a nice golden cross? Is the RSI overbought?

Portfolio Management Perspective
This is a broader, more strategic level of considerations that look at the whole portfolio. One considers the pre-determined portfolio weightage that is assigned to a stock, and decide whether to sell, taking into account his risk profile, size of portfolio, size of share position etc.

Investor Psychology Perspective
This is where your mind plays tricks on you to generate fear of missing the possible rally post-selling and whether you are maximizing profits. And what should you do if there is really a rally? Many questions, many inner voices.

So How?
All these factors from different dimensions rarely influence your decision-making in silos. They act up all at the same time, and make you unsure and confused about whether to hit the sell button. And they are inter-linked at times. For example, you assessed that the share price has not much room to rise further, but when you look at its weightage of just 5% out of the entire portfolio, you may not sell since it’s a negligible position and selling now will not earn you much anyway. Concurrently you may also hope that it will rise further and do not want to miss the ensuing rally.

There are no clear solutions to this conundrum. If there were, I will not be writing this, and investors will not have headache over selling so often.

After multiple encounters with selling difficulties, especially in current market which shares are rising fast, I had decided to approach selling by asking only several questions, distilled from my experience and stock value determinants that are aligned to my investment philosophy. They are not intended to illicit deeper analysis, or trigger further tinkering. Just simple, straight-to-the-point questions to help one decides. 

More importantly, I would make a conscious effort to be contented with my profits, and not invalidate the decision process flow, by checking the share price right after selling. If the price rises, seller remorse kicks in and I may question the decision making process. If the price falls, I feel good about myself and this will bring emotions into my investment process, affecting my analysis in future.

I prefer to keep selling short and simple. After all, majority of the work is done before buying, and now one is already in-the-money and there is really no point dwelling too much on it as a happy problem to have.

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