Bottom line up front I like WD. I respect him and I think his work is well worth reading, informative and generally correct. It is also well intended and he is genuinely putting it out there to help others.
That being said I do occasionally find myself questioning what he writes and in a recent article when he seems, to my reading, to be coming down very much on the side of hold and carry on holding, I thought I might throw my cap into the ring.
There are realistically only 5 reasons to buy a stock (there are variants of these, but 5 base cases).
1 – You believe the share is demonstrably undervalued as of today and that at some stage in the future the market will recognise this undervaluation and move the price nearer to underlying value – The Value Investor
2 – You believe the company is reasonably valued today but that there is a significant opportunity to grow and this growth will lead to a higher valuation once the story is understood and growth is being delivered. The GARP (Growth At A Reasonable Price) Investor
3 – You believe that whatever the share is worth today there will be a bigger fool out there tomorrow and they will pay more. The Trend/Momentum Investor. This also works in the reverse direction with shorting.
4 – You believe in the efficient market theory and you’re buying an index/ETF as you believe that over time equities will perform as part of a balanced portfolio. The Index Investor
5 – You are buying equities for principally (if not clearly stated) none financial reasons. You either want an association with certain companies, Apple fanboys etc or you want an association with trading-investing and are just happy to be gambling in the equity casino. The nutjob investor
Each of these cases have a price where you should sell the stock.
There is a lot to be said for long term buy and hold. And at the moment there does seem to be a lot being said about it. Companies like Google, Facebook, Amazon and Netflix have all done incredibly well over a number of years though with a lot of volatility. There are even books such as “100 baggers” by Christopher Mayer or “100 to 1” by Thomas Phelps. All of these are examples, or extol examples,where a longer term buy and hold strategy has delivered massive success. But these examples are very much the exception.
Over the periods of 5 – 10 or indeed 15 years most shares make little or indeed have a negative performance. LLoyds was 290p 10 years ago. BT was 320p and is now 321p. Speedy Hire was 350p and is now 54p. I know these, as they are all currently on my watchlist.
In reality markets do not float all boats equally. But what often gets displayed is survivorship bias. If a share goes to the moon it gets remembered. If it collapses out of existence we stop talking about it or it gets dropped from an index or portfolio.
All 5 reasons to buy have a sales price.
1 - If you are a Value Investor buying below Intrinsic Value with a Margin of Safety you approach has to be one where you calculate the Intrinsic Value. Once a share rises to that point you have your value and should sell. If I can buy £1 of value for 50p then well done me. I have a significant Margin of Safety. But once it gets to 80p+ my Margin is being squeezed and its time to consider selling. Once it is at £1 I should be sold. Now that doesn’t say the share cannot get past £1 but it does mean that I am not gambling on someone else paying more than the business is worth. Seth Klarman of Baupost has frequently said he is prepared to lose the top to avoid gambling on a share with no MoS.
2 – If you are buying on the GARP thesis you should know what validates that thesis. Great runway, low competitor risk, long term market, etc. But nobody goes to infinity. I hold Treatt under a GARP thesis. Today it is circa 475p, 10 years ago it was 65p. If tomorrow someone offers me 48p0 I am not a seller. But if the offer 900p I will. Can Treatt get to 900p one day under its own steam. Possibly but will it do it short term. No, so take the money. I recognise that many people say they have bought a share under a GARP thesis and then want to run any gain, or hold waiting for the thesis to pan out. But simply putting a share under the bed and waiting for it to deliver is not sensible. If the company delivers year after year then keep it. But if it does not deliver be prepared to check your thesis, check when you believe management will deliver, when the market will notice and if need be sell it.
3 – Momentum trading is run the position and set your stop losses. Any momentum trader should know where the risk level is and set their stop losses accordingly and whilst they may run the share price up or down they know where the cut out is and take the sale at that point. If you don’t have a definitive sale point you are not likely to be a momentum trader for long.
4 – Efficient market theory says the price is right. As a small portion of a diversified portfolio you may not have a sale price. Except that any long term diversified portfolio requires periodic rebalancing and at that point if required you need to sell the share at the current price.
5 – If you are buying a share for non-financial reasons or just gambling then you should sell the share when it meets or fails to meet those reasons or the gamble moves on.
To make money on stocks do not fall in love with them. Know why you buy them and know when you ought (depending on your strategy) sell them.
I am not a big fan of regular trading. I do personally size in to most positions. So I buy some and then I buy some more. Equally I often do not close a position in one go, reducing as a share squeezes my margin of safety. And there is a significant body of work to show that holding the right companies for a long time is an incredibly successful approach. But one or two wonderful long term holds should not be seen as validation for a basketful of squirrels that you hope will produce oak trees, if you don’t face up to them when they are fully valued and sell the damn stock.
Just for your consideration I have set out the current FTSE 30 share price today and where they were 10 years ago. It is worth noting that this; the current list has the survivorship bias of not covering those that have fallen out.
Companies that made a 5% compound return are in green.
Less than a 5% capital return but +ve.
Companies that lost capital value are in Red
FTSE 30 Constituents – 10 years Ago Todays Price
Associated British Foods £9.5 £28.7
BAE Systems 450p 640p
BP 589p 460p
BAT £16.07 £54.08
BT 320p 321p
Burberry £6.95 £16.45
Compass £3.92 £15.47
Diageo £10.63 £23.05
Experian £5.91 £16.87
GKN 267p 345p
GSK 1444p 1645p
IAG 502p 599p
ITV 120p 190p
Ladbrokes 362p 122p
Land Securities 1780p 1132p
Lloyds 290p 68.7p
Man Group 648.6p 160.7p
M&S 732p 377p
National Grid 689p 1043p
Prudential £7.63 £17.60
Reckitt Benckiser £27.26 £73.56
RBS £56.12 £2.59
RSA Insurance 738p 616p
Smiths Group £11.33 £16.49
Tate & Lyle 636p 764p
Tesco 472p 179p
Vodafone 178p 211p
Wolseley £57.12 £47.95
WPP £7.52 £17.06
3i 100.5p 197.5p
However whilst I do believe there is a time to sell ultimately investor or trader you should do what enables you to sleep at night. As WDIK & DYOR.