Bottom Line/Personal
: One of the hardest decisions investors have to make is when to sell a stock. And in fact, the financial press often ignores the question of when to sell, as if people have unlimited amounts of money and all they have to do is buy, buy, buy.
I’m Steven Kaye, editorial director of Bottom Line Publications, and this is Bottom Line On Your Money, where our experts help you create, invest and protect your wealth.
Today I’m speaking with Vahan Janjigian, PhD, CFA. Vahan is editor of the MoneyMasters Stock Report newsletter, chief investment officer at Greenwich Wealth Management and author of two books, including Even Buffett Isn’t Perfect. Vahan previously served as editor of the Forbes Special Situation Survey newsletter, where he was ranked the number-one stock picker by Hulbert Interactive for the decade ending in December 2012.
You do have to sell your investments sometime, and we’re going to talk with Vahan now about that question. How do I know when to sell a stock?
Vahan Janjigian, PhD, CFA: That’s a very difficult question to answer. In fact, when I look back at my own investing history, I find that the biggest mistakes I’ve made were always selling too soon. So it’s a tough decision, when to sell a stock.
What I typically recommend is that you shouldn’t sell a stock unless you’re very confident that there’s some better investment to put the money into. So that’s when you should sell the stock. In fact, one of my favorite sayings from Warren Buffett, when asked what is his favorite holding period, he said his favorite holding period is “forever.” And he said that the only time he would ever sell a stock is if he thought there was a better opportunity to invest that money.
So it’s difficult, but what I typically do is I use my conservative discounted cash-flow analysis to find undervalued stocks. But I also use that analysis to determine whether a stock has now become overvalued or fully valued.
I’ll give you a couple of recent examples. Buffalo Wild Wings is a stock that I recommended to the subscribers to my investment newsletter. I did the analysis—the stock seemed to be very undervalued when it was selling at about $102 per share. I decided to go through with the recommendation.
It eventually started going up. When it got to around $150, I could no longer justify the price, so I decided it was time to sell. The stock came down a little bit—actually, at that time, I decided to add a little bit more in my portfolios. But I haven’t come out with a recommendation on the stock again because it hasn’t become grossly undervalued, in my opinion.
Another recommendation I’ll give you is RF Micro Devices. I recommended that stock at a time I thought it was very undervalued. The stock was selling for, as you can see, $4.90 per share. I came out with the recommendation. It didn’t do much for awhile, and then it suddenly started taking off. And as you can see, I decided when it was at $6.66 that it was time to get out. My analysis indicated that it was now fully valued. But as you can see on the chart, I would have been better off staying in that position, because it continued to go higher and higher and higher.
What often happens is a lot of these stocks go from becoming undervalued stocks to momentum stocks, and momentum can actually take it higher for quite awhile. So when you sell, you might not want to sell everything at once—you might want to just sell part of the holding. Oftentimes, you could end up selling too soon.
Bottom Line: For your newsletter subscribers, you always recommend selling before you recommend doing something else with that money. You’re not assuming that they can buy an unlimited number of stocks.
Janjigian: Well, I’m not assuming that they can buy an unlimited number of stocks, but I do assume that they are in a position to put an equal amount of money into each of my recommendations. I typically have no more than about 15 recommended stocks in my portfolio at any one time. So it’s not like you have to buy a tremendous number of stocks to keep up with the recommended list.
Bottom Line: RF Micro Devices—that was a good example of a time when holding onto the stock would’ve been a good thing, in retrospect. And that makes me wonder to what extent the question of selling is a science and to what extent it’s more of an art. Can you tell us about that?
Janjigian: That’s a good question, because everybody thinks that finance and investing is a science, because, of course, it’s very mathematical and we use all kinds of formulas to determine when things are undervalued, overvalued, what they’re valued. But it really is more of an art, because everything is based on assumptions. So you make those assumptions, you’re really relying on your own personal perspective and your own knowledge. So it does become an art.
My view is that if you sell something too soon, as long as you made money, that’s a good thing. You might kick yourself a little bit if the stock keeps going higher and higher, but that’s why you always have the choice of keeping a few shares, just in case that happens.
Bottom Line: What I often see in many investors is somehow the idea of having bought the stock makes people want to not have to sell it. It’s almost as if they have to admit a certain kind of defeat, where they made a mistake when selling.
Janjigian: Well, yes. In fact, in my book, Even Buffett Isn’t Perfect, I have a chapter called “Never Marry a Stock.” My mother once told me a long time ago that she can’t really bring herself to sell stocks because she thinks of her stocks as her children, and she couldn’t possibly sell them.
But you shouldn’t think that way. You should always be looking out for good opportunities. If you see a good opportunity to invest in and you don’t have the capital available, then there’s something else you can sell to actually raise that capital. If you have 20 stocks in your portfolio, then obviously there are some you like a lot better than others. If you come across a 21st stock you really want in your portfolio, then sell one of the other stocks in your portfolio to get the money to buy that.
Bottom Line: How is your thinking different when a stock has gone up higher than you think it should be, really, versus when it’s dropping and, on paper at least, you’ve lost money on it?
Janjigian: I don’t mind losing money on paper as long as my long-term view on the stock is still positive. So if I really believe that the drop in the price is temporary and there’s been no fundamental change in the company, then I’m willing to add more money to that position. Of course, that averages down my cost.
When you do that, of course, you do take the risk that the stock will continue going down indefinitely. There is such a thing as momentum in stock prices, both on the upside and the downside. Oftentimes, when a stock falls, it will continue to fall for quite some time. So you have to make a judgment call—when is it the right time to buy more shares…or when is it the right time to just say, “You know what? I made a mistake” and get out of the position?
Bottom Line: The bottom line is don’t love your children too much when we’re talking about stocks, and be willing to cut them loose when the time is right.
Janjigian: Love your children as much as you want, but don’t love your stocks.
Bottom Line: There you go. Thank you very much, Vahan.
Janjigian: Thank you.
