Don’t Sell Too Soon!
When to Sell Stocks
Investing Safely is Critical
My Solution for When to Sell Stocks
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Don’t Sell Your Stocks Too Soon!
How often do you trade your stocks during a year? Do you turn over your portfolio an average of once a year, twice a year or 12 times a year? In this age of super-fast computers that are programmed to trade in nanoseconds (one billionth of a second), should we trade more often to keep up with the ever-changing stock market?
Mark Hulbert, founding editor of the Hulbert Financial Digest, has been tracking investment advisories for a good many years. The Digest follows the performance of hundreds of investment advisories.
Mr. Hulbert and his staff recently compiled a huge database to find out how the frequency of portfolio transactions impacted performance results. He gathered 30 years of history from hundreds of advisories.
For each advisory, Mark Hulbert and his staff made a comparison of how an advisory’s portfolio actually performed in each year compared to how the portfolio would have performed if the portfolio recommendations remained the same (frozen) from the beginning of each year to the end of each year with no transactions.
Since the early 1980s, two-thirds of the portfolios would have performed better by not buying and selling during each year. Furthermore, in EVERY year the frozen portfolios performed better than their actual portfolio counterparts which included trading during the year.
In 2010, for example, the 500 model portfolios that Hulbert Financial Digest tracks gained an average of 14.6%. Not bad, compared to the Standard & Poor’s 500 Index gain of 12.8% in 2010. However, if the 500 model portfolios had been frozen at the beginning of 2010 with no transactions allowed, the resulting gain would have been 18.0%. That’s an annual 3.4% difference gained by holding your stocks. Wow!
An additional study lends credence to Mark Hulbert’s findings. Finance professors Terrance Odean of the University of California at Berkeley and Brad Barber of the University of California at Davis studied the trades made in 10,000 randomly selected accounts at a major discount brokerage firm between January 1987 and December 1993.
Odean and Barber’s study focused on cases in which investors bought a stock less than 30 days after selling another. The researchers found that over the 12 months following the transactions, the stocks that were sold performed 3.2% better than the stocks that were bought. Investors would have been far better off had they done nothing.
When to sell stocks?
So the $64,000 question is: How often should you sell your stocks? There is no single answer, because it all depends on what type of stocks you’re trading. I’m a conservative investor, so I tend to hold onto my stocks for about 22 months, on average.
The data and studies seem to suggest that the longer you hold, the larger the profit. I advise using sell targets with the goal of achieving maximum gains within two years. Sounds idealistic, I’m sure, but if half of my stocks reach their targets, I will easily beat the market.
Holding stocks for longer periods of time has another benefit—receiving dividends! Dividends are the regular cash payments that a company sends to you or to your brokerage account. You also have the option to instruct the company or your broker to reinvest your dividends into additional shares or fractional shares.
Dividends are the payments of a company’s hard-earned profits. A company’s ability to pay dividends regularly provides concrete evidence that the company is performing well. And accounting malfeasance is harder if a large transfer of cash is going to shareholders on a regular basis.
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Lessons Learned
The Mark Hulbert and Odean/Barber studies provide clear evidence that most investors, even professional investors, sell too early and leave profits on the table. This is understandable. So-called sell rules often fall short of their intended goals.
Most advisors think short-term. If it looks like a company is going to produce good earnings for the next two to four quarters, a buy signal is flashed. A long time ago, I read an article that claimed that 80% to 90% of buy recommendations are based on sales and earnings estimates for the next six to 12 months. In my opinion, investors are missing an opportunity to reap great profits when they don’t look further into the future.
I have been estimating two-year sell targets for decades, because my extended holding period produces far superior results. The average holding period for recommended stocks in my Cabot Benjamin Graham Value Investor in this decade is 22.5 months. My recommendations have easily outperformed the popular market indexes during the past one-year, two-year, five-year, 10-year, and 15-year periods.
My system is simple. Using formulas created by Benjamin Graham many years ago, I calculate a reasonable price to pay for a stock as well as a price to sell the stock. I maintain a database of 1,025 stocks and calculate buy and sell targets for all of these stocks. As of May 14, 40 stocks are selling below my buy target and are considered undervalued. Of the 1,025 total stocks, 476 are now selling above my sell target and should be avoided.
Until next time, be kind and friendly to everyone you meet.
Sincerely,
J. Royden Ward
Chief Analyst of Cabot Benjamin Graham Value Investor
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