The Selling Process Part 1 3 comments

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Technically, selling off a stock that one holds is just the reverse process of buying into it. However, the emotions involved in both are quite different, and I find that without being aware of these emotions it often affects one's judgment and discipline.

When one buys into a stock that he has been researching for some time, he experiences a flow of feel-good endorphins because subconsciously he feels he has "accomplished" or "acquired" something. I have already mentioned the dangers of buying a "falling knife" and the need to exercise patience in the buying process in an earlier article, The Buying Process Part 1.

For selling a stock that one owns, it is a different thing altogether. I often don't enjoy selling a stock that I have been holding for some time, even though it might have made a profit. This is because I have invested much effort into researching the stock and monitoring it ever since I bought into it; it is a subconscious emotional linkage which combines with a fear that the price could go up further after I sell it.

This happened with a stock that I was holding, Stamford Tyres which I bought in August 2003. It surged from a split-adjusted 32 cents when I bought it to 75 cents by early 2004, riding on the market boom and strong expected profit growth for the next year. At 75 cents it was about 16 times trailing PE, way above what I would normally pay for a stock. However due to the abovementioned fear of losing further profits I held on, somehow finding reasons not to sell. This intellectualisation process, where one rationalises reasons in order not to do something that he subconsciously already does not wish to, is what affects selling judgment. Of course, the stock went into a tailspin soon after, as it announced that its results for its next year would not be as good, hence dashing all expectations priced into the high PE.

That is why nowadays, I often examine my views about my stock holdings to assess whether this process of intellectualisation might be causing me to have rose-tinted views about my holdings and stopping me from moving on to other stocks. This is especially so for those holdings whose prices have surged significantly. One way to achieve this is to take a step back and consider if you would buy the stock at its current price if you do not own it now. In adopting such a perspective it is definitely important to adopt a neutral stance, and nothing is better than valuation metrics in this respect, things like trailing PE and historical trading bands. If the answer whether one would buy is yes or a tentative yes, one might want to hold further. However, if the answer is no, then surely one should consider letting go, albeit not rushing into it given that the stock still has some price momentum.

This approach is not mutually exclusive with the old adage of letting profits run. Ultimately it boils down to three things: whether one considers the company to be anchored by a long-term fundamental trend that might be increasingly recognised by the market (eg. the oil trend recently); secondly, how long-term one's investing horizon is; and thirdly, the availability of much more compelling buys in the market at the moment. One has to recognise that it is rare that one happens to own a Venture or a Hyflux, and that it might serve him better to be more diligent in watching the rise of new trends and moving his funds in accordance with them.