How you can sell like the experts
Warren Buffett doesn't like to sell. In fact, the famed investor once said his ideal holding period was "forever".
It comes as no surprise, then, that selling can often be one of the most difficult parts of investing, and can render even the most astute investor sick to their stomach. Yet still we tend to hang on to our investments far longer than we should.
In this episode of Buy Hold Sell, we go back to basics, taking one of your most requested education topics to the experts.
Livewire's Bella Kidman speaks to Jun Bei Liu of Tribeca Investor Partners and James Gerrish of Market Matters for a deeper understanding of the ins and outs of selling, from identifying the right time to sell, facing bad company news, and deciding whether to sell your holdings gradually or in one fell swoop.
Notes: You can access the video, podcast or edited transcript for this Buy Hold Sell episode below. This episode was filmed on 27 January 2021.
Bella Kidman: Welcome to Buy Hold Sell, brought to you by Livewire Markets. My name is Bella Kidman, and today we're going to attempt to answer the million-dollar question, when is it time to sell a stock?
Warren Buffett once said that if he never had sold a stock, his returns would be greater than they are today. But surely there's a time where every investor has to depart from a company. To help me answer that question, I'm joined by James Gerrish from Market Matters, and Jun Bei Liu from Tribeca Investment Partners.
Jun Bei, I'll start with you. In a perfect world, every investor would be buying at the bottom, selling at the top, but of course, that isn't the reality. Can you walk me through the process that you go through when you're going to sell a stock?
Jun Bei Liu: Of course. So look, I think you're asking actually most important question. When I first started, someone told me the hardest thing in this market is not buying the cheapest stock, it's actually finding the right time to sell.
So when we're looking at selling, one of the key things to look for are:
- whether the fundamentals changed
- whether the earnings are changing
- whether our long-term investment thesis changed
- whether the industry dynamics change
If all of these are intact, it probably means that the company probably has a bit more to run.
Now of course, if we're asking this question, the share price has probably run really hard, then it comes down to what's the next best option? Do we have somewhere else where we can put money into? Is there another company going to deliver another 50% relative to this one may deliver 10%. So it's a relative call for us unless something fundamentally has changed about that business, then you need to make the call on the day and ask yourself “is that something you really want to hold?” Fundamentally management change or someone you really bought back or industry disruption, or any of that you need to make the assessment on the day and make the decision whether that should be something that you do want to hold.
Bella Kidman: James, is nothing worse than selling a stock, waking up the next morning and seeing it's just shot up? So how do you avoid that, what are some of the rules that you follow?
James Gerrish: I don't think you can avoid that. Frustrating things like that will happen in the market, and I think you've got to be comfortable with it and approach your investing with a pragmatic view. So I think you're absolutely right, I think there's too much emphasis on what and why you're buying a particular stock than when to get out.
I think to Jun Bei's point, the most important thing is about:
- why you bought a particular stock
- what your investment thesis was at that particular time
- then sell a stock if that investment thesis changes
Markets evolve, the macro environment evolves. I use technical analysis to see if a stock is losing momentum. And that might prompt us to think about the original thesis and whether that thesis is starting to show signs of cracking. So to me, the most important thing is document why you bought the stock and then refresh your thesis based on that.
Bella Kidman: So you've walked us through the process. Now, what are some of the resources that you're relying on when you're thinking about selling a stock?
James Gerrish: Yeah. So obviously understanding the drivers for that particular business. So whether it's looking at the numbers, talking to the company, being engaged with the company, we've got a team of analysts that we obviously draw upon there. Jun Bei made a great point that it's a relative game, we're a high conviction manager, so we have up to 20 stocks in a portfolio.
You've got to have another idea that is better than the one that you're taking out of the portfolio. So to me, I don't get caught up on hard and fast rules. I think there are nuances with every stock and I think you've got to apply that level of judgement and the level of experience that you've developed over time. That's what people pay us money for, to make decisions and sort of back your decisions and not be caught up in whether that decision is right in 24 hours or not.
Bella Kidman: Jun Bei, same question to you, what resources are you looking at when you're selling a stock?
Jun Bei Liu: I think it's all very different based on the sectors or characteristic of the sector itself. So what I was thinking, some of the companies such as Afterpay, you probably would have sold many times over the last 12 months, you probably sold at $30, $50, $100, and now almost $150. So to me, growth companies, very structural growth leaders are very different from the cyclical companies. And these other companies require economic activity to pick up like the manufacturing, like the steel business, like some of those businesses. Now with the structural growth leaders, these businesses, it's about identifying the right fundamental drivers. And as long as they are intact, you almost you never want to sell out of your portfolio.
Bella Kidman: Very interesting. So we saw last week a few names, we saw Tyro (ASX: TYR), we saw Alibaba (NYSE: BABA) had just huge sell-offs and it was primarily to do with some bad news in the market. How do you approach that? Do you sell-off with everybody else or are you looking at it as an opportunity to top up your holdings?
Jun Bei Liu: This is what we love. That's a great question, this is what we love about the current equity market actually, it presents so much opportunity. Most of the investors in this market today, they're very short term. They're focusing on the next month.
If we take a six-month view, we actually can see so much opportunity because we can buy today and we don't need it to perform until a month, two, three, four. So things like Tyro, for example, is an incredible opportunity on the back of their short-seller report. Yes, they did have an outage. Yes, it shouldn't have happened, but we can see the company has identified the issue and the code issue has been rectified. I think it's close to 100% are already being fixed with the retailers. We checked with the national point of sales (POS) people and they say Tyro still provides the best service. The banks are still yet to jump at this opportunity to take any share.
Tyro has identified the issue, fixed it, and already come up with solutions in the future of how they might provide alternative solutions so that they don't encounter this again. So it won't happen again. To me, it's a growth stock that will grow at 30, 40% over the next couple of years, trading a very reasonable discount. And right now investors are just a bit worried about the short-term earnings. To me, it's a great opportunity,
Bella Kidman: James, do you agree a sell-off is an opportunity?
James Gerrish: Yeah. It depends on why the sell-off happens and whether the reason is a transient reason or it's a structural reason. So you can often have a little bit of both, in terms of Tyro I think it was a transient reason. I don't think the structural nature of the business has changed. I mean, this is a business that's built vast scale on undercutting the banks and their growth has been phenomenal over a number of years. So we've got the company in our emerging businesses portfolio. Would I add to it now? Probably not. We've got a reasonable position there.
I think it'll probably take some time for this issue to work through the market to regain confidence in their ability to continue to grow. So I think it's had a hit to it, their reputational issues I think are real, but I think yeah, in the next couple of months they'll probably work through that, but I think the market will probably wait to see the numbers and the growth rates before it bids the stock up further. So look each by each, but the main thing is around transient versus structural issues.
Bella Kidman: One of the biggest questions when selling a stock is, how do you actually do it? Do you do it all at once, do you do it gradually? What's your preferred method?
James Gerrish: Yeah, I'd rather do it all at once. And if I've made the decision to get out of it, then I'll get out of it that. That's obviously got issues around depending on how big the position is in the portfolio. If we've got a large weighting, we simply want to trim it down to a more modest weighting. We do that at times, but overall my general rule is if I'm out of a stock, I'm out of it. I want to move on and put something else in the portfolio, the decision's been made. You might as well have some conviction in your views and move on.
Bella Kidman: Jun Bei, do you agree, all at once or gradual?
Jun Bei Liu: Depends. Look, if something's gone wrong, if my investment thesis changed and I no longer believe this company is worth what I thought it’s worth, or there is industry change and disruption, I'll just want to sell it because there's no point trying to hang onto something that hopefully will come back when you know the thesis has completely changed. So put that aside, sometimes and most of the times it will be actually more trimming. You trim a little bit, you've done very well out of that position, and it's grown a lot in your portfolio, and you want to buy the next big thing. The next thing, say whether it's Tyro or whether it's something else, you want to put that to work elsewhere.
Jun Bei Liu: So a lot of time it's about trimming, you just bring it back to the percentage. So you say it was 2% of your portfolio grown to 3%, you want to bring it back. And that 1% you allocate to something that's going to grow, whether it's Red Bubble or other things and it will generate another 40%. And that's how you keep up with the active return because we do long-short as well. So we make sure our portfolio is extremely active.
Bella Kidman: There's a lot of pain that comes with selling, but tell us about a time where you've sold at the right time, you're punching the sky and it's all done very well for you.
James Gerrish: Yeah generally I'm not that good a seller of stock. So I put my hand up and you've got to realise your shortcomings when managing portfolios. But one of them we did sell pretty well was Appen and it sort of speaks to what I've been discussing earlier in the programme, just around your thesis for buying a stock. So Appen we bought last year, we bought it because it had really strong earnings growth. We wanted that earnings growth to continue. In November we sold the stock, just before that they came out and talked about their earnings, but they put a key caveat in their earnings that the Aussie dollar had to be 70 cents, where it was based on the assumption that the Aussie dollar was 70 cents.
James Gerrish: So when the Aussie dollar is well above 70 cents, that implies that they're going to do tough in terms of earnings so we offloaded the stock, they came out with a downgrade thereafter. So I guess that speaks to continually evaluating your thesis. The technicals of that stock looked weak and that's what prompted us to revisit it and tie it back into our original view for buying that stock. So that was one we got well, Bella, there's plenty of stocks that we haven't sold that well either.
Bella Kidman: June Ben, can you give me an example of a time that you did well when you were selling?
Jun Bei Liu: Oh wow, okay. I kind of agree with James, there are many times where you thought, okay, where is the top? It's always very difficult. But one example I would use is that, because we're a long-short fund, so we can short as well. So we have a lot of short examples we can use, so I guess without offending anybody, one of the examples we would use is Speedcast. So a lot of people like this company for its thematic, you probably know it's been suspended and pretty much gone into voluntary administration and the like in the last 12 months or so. The business was well-liked because all their exposure providing satellite internet broadband to the cruise ships, the mining sites, and all of that. And they bought a lot of those mining sites as exposure at the top of the market, and the market crashed when the oil price fell, and they had a lot of debt.
So we took a short position, and we have done very well out of it. The company's equity value has pretty much been wiped out. And this is where we see that sometimes when you see really cheap value stock, you just got to be aware where you buy, because it may be very cheap, you may well double your money. But the risk is really stacked against you because there's so much that's going wrong in that business that you just got to do a lot of due diligence about it.
Bella Kidman: Jun Bei, buying a good company is hard, but letting go is even harder. So if a company is so great, why should investors be selling them, shouldn't they be holding onto them forever?
Jun Bei Liu: Honestly I feel if it is a structural winner, you should be holding onto them. You may want to take profit from time to time because you only have a limited amount of capital available, what if you want to buy the next thing that's also doing really well, you want to be a little bit more active. But honestly, backing a winner of especially the structural winner of that sector, that will make you so much more money than trading in and out of those stocks. So that is my belief, but in a portfolio sense, you probably have a little bit of structural winner, little bit of value stock, little bit of stock that you trade here and there. But if you found the best structural winner, the best way to making a return is hold onto them.
Bella Kidman: James, Jun Bei's a holder. What about you, should investors be holding forever?
James Gerrish: Yeah, I tend to agree if it stacks up every time you look at it relative to the other opportunities out there, why not hold it? So I'd bring you back to the original thesis that you bought that stock if that still stacks up and still we've got, as I said, a reasonably high conviction approach. If it's still in the top sort of 20 stocks that we want to hold in the portfolio, then great, hold it forever. But you've got to continually test that thesis and not just rest on the fact that you're up 100% on the position or whatever it is. So you've got to keep testing that thesis.
Bella Kidman: Well, our fundie agree with Warren Buffet, it's all about holding. If you've enjoyed this episode of Buy Hold Sell, make sure to subscribe to Livewire's YouTube channel.
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Buy Hold Sell is a weekly video series exclusive to Livewire. In each episode two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies. Not recommendations, please read the disclaimer and seek advice where appropriate.