Scalper1 News
Summary Does it pay off to sit on one’s hands and do nothing? I wanted to know and carried out a brief review of my past sell decisions. Holding clearly outperformed selling, but selling seems to have lowered both, returns and risk. Never look back? With regards to closed positions I used to follow a strict ‘never look back’ policy, because I considered it unhelpful to spend time thinking about what could have been. Recently, I broke with this paradigm. Not because I like to kick myself, but rather to test which of the following competing concepts would work better for me: Monitoring all holdings closely and trying to optimize capital gains and portfolio structure by selling when the time has come (whenever that may be) Sitting on my hands and doing nothing while accumulating shares. It may not have been a conscious decision, but I happened to follow the former approach in the past. I felt not looking after the portfolio might be irresponsible. However, when looking after the portfolio I found there were always reasons to worry. Typical reasons to sell were: Concerns about the respective company’s business model Immediate issues with unclear outcome (e.g. accounting issues, legal disputes) Perceived lofty valuations Then I wondered: What are the worst losses that I managed to avoid through trading and what are best opportunities that I missed out on? Would I be better off if I stayed hands-off? Looking back Past sell decisions can help to find answers to these questions. If you are happy to gain valuable, but potentially painful insights, you might want to carry out a review as follows: Put together the data on all positions that you ever closed. Establish the respective cost base of these positions and the profit/loss that you realized when you closed the positions. Look up the current prices of the securities you sold. Calculate what your former holdings would have been worth today. Compare with the realized profit/loss. Results This is what I did and here is what I found as I went through the 32 trades that are on my records of the past four years: I made a profit on 29 positions. The average gain was 16% with the largest gain being 58% (these are total, not annualized gains in local currencies, including all trading fees, but no dividends). I made a loss on three positions. The average loss was -19% with the biggest loss being -33%. The average profit across these 32 trades was 13%. Comparing the realized profits and losses with current prices, I figured out that I made 15 good exit decisions (=current prices are below the prices at which I sold) and 17 poor exit decisions (=current prices are above the prices at which I sold). All three stocks that I sold at a loss were among the good exits. Also, pulling the plug on my long-term government bonds in late January this year turned out to be a good move. A further pattern is that it was mostly a good idea to get rid of the more speculative plays (special situations, turnarounds). The biggest loss that I managed to avoid was -56 percentage points (=my realized profit was 9% and I would be under water by -47% now had I kept the stock). The poorest exit decisions were taken more than two years ago. Today, I find it difficult to understand what made me sell, since I cannot remember any red flags. The best explanation I can offer is that the share prices did not go up as I expected and I lost patience assuming that I missed something in my assessment. In that situation I was almost looking for black cats in dark alleyways. The biggest gain that I missed by selling was 300% percentage points (=my realized profit was 1%, but the stock has gained a further 299% since I have sold). Had I kept all the positions that I sold the total gain would have been 37% rather than 13%. Conclusions The interpretation of the results is not straight forward. Given the overall bull market for stocks and bonds in recent years, it had to be expected that keeping would win over selling on average. My brief review did only compare selling against keeping. It did not compare keeping against reinvesting of realized proceeds. Also, of course, I did not consider time frames in that I only looked at overall returns not at annualized ones. Still, there are some conclusions that I find useful: When I sold it was due to concerns (or fear if you like). The ‘never look back’ policy implied already that I could miss out on opportunities by selling, but I never realized by how much missed opportunities can outweigh risks in total even when some of the risks do eventually materialize. Being lazy, I was actually hoping to find evidence that a complete hands-off approach would be superior to my trading activity. Things turned out to be a bit more complicated, though. It feels reassuring that I proved to be right whenever I closed a position at a loss. The best and worst performers in my current portfolio have returned +191% and -17% respectively so far which compares against +300% and -57% among my past holdings. Although it was not an outspoken goal, I do feel more comfortable in the current range that seems to offer a more limited downside. Apparently, I could not expect the portfolio to be low maintenance, when (some of) the stock picks were not. Now that I have eliminated the stocks that were a bit too exciting for me, it may have become easier to stay away from the sell button. Stocks In order to keep the focus on method and results, I decided not to mention specific stocks above. If you are curious about the stocks behind the numbers, here is a small list: Largest realized gain: Novartis (NYSE: NVS ) Biggest realized loss: Finavera ( OTC:FNVRF ) Biggest avoided loss: Power REIT (NYSEMKT: PW ) Biggest opportunity I missed: Royal Wessanen ( OTC:KJWNF ) Best performer in my current portfolio: I.A.R. Systems ( OTC:IARSD ) Worst performer in my current portfolio: HCP (NYSE: HCP ). Disclosure: I am/we are long IARSD, HCP. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
Scalper1 News