“Buy low, sell high” sounds simple enough. With 24/7 media coverage, investors easily can find actionable investment ideas. In many ways, the investment industry is designed to cater more to buyers rather than sellers. As a result, understanding when to sell an investment can be difficult.
Seasoned investors know a number of other pithy aphorisms like, “buy right and hold tight,” “nothing ventured, nothing gained,” “the trend is your friend” or “buy on the rumor, sell on the news.” My favorites are “pigs get fat, hogs get slaughtered” or “be fearful when others are greedy and greedy when others are fearful.” (Warren Buffett)
Good sellers learn when to take a profit and when to cut their losses. To do this, they have to master their emotions. If they consider selling an investment at a profit, their emotions tempt them to hang on for an even bigger profit. If the investment is down and they are at a financial loss, their emotions persuade them to wait until they get back even. Skilled sellers master their emotions by tuning out the most extreme opinions and focusing on the big picture. The fact is no one knows the best time to sell, because we don’t know what the future holds. As a result, good sellers learn to act on reason. They keep their personal investment goals and risk tolerance in front of greed and fear.
The primary function of our sell discipline at LeConte Wealth Management is risk management. As of May 2011, we are responsible for investing almost $70 million for our asset management clients*. They empower us with the responsibility on what and when to buy and sell on their behalf. In our investment committee meetings, we spend most of our time addressing the risk of the various investments that we hold. When we decide to sell something, it is almost always to adjust the risk in their portfolio.
In our analysis, we evaluate if the potential return outweighs the potential risk. If it doesn’t, we sell. No hand wringing, no hoping for a different outcome – we do it. Since we ignore the most extreme opinions in the market place, we usually act incrementally. When the risk/return profile is negative, we begin the process of reducing risk by selling a portion of the particular investment. If our analysis is confirmed, we sell the rest of the position. If we are wrong and the investment makes money, we profit from the partial position and can reevaluate our analysis.
In assessing the economic, political and seasonal factors, we reached a point this past May that dictated risk reduction for our clients. Only time will tell if “sell in May and go away” holds true for the summer of 2011. For our part, we are comfortable taking less risk right now.
*The author is an Investment Adviser Representative of Commonwealth Financial Network, a Registered Investment Adviser.