Why You Keep Selling Stocks At The Wrong Time

There's a saying that you make your money when you buy, not when you sell. But whilst there might be some truth in that, unless you're a property investor or an antiques dealer, the stock market is a very different animal. And after 15 years of investing, I know that volatility changes everything once you're in the trade, and you either win big or lose big based on your decision-making after you've already bought. So in this video, I'll explain how the pros always know their exit well in advance. The difference between patience and otherwise refusing to admit that the situation might have changed, and the hedge fund framework for deciding when to hold, when to trim, or when to simply walk away from a position. So why would you ever sell at all? It probably sounds like a really dumb question. You're only going to be in one of two positions. So starting with the good news first, let's say a stock you own has gone up a lot and It's a nice problem to have provided that you're not going to sell too early. So what this is really about is anchoring bias. We have something for comparison to say it's gone up a lot, but a lot of investors will put it down more to valuation. Now it's expensive or it's no longer good value. But what's happening here is something that leads often to what Buffett called a mistake omission. So going back to, I think this was mid-'90s around here, Pepsi, as you can see, was trading at about $30 to $40, whereas the earnings per share was only $1, meaning that they were trading at 30 to 40 times on a PE ratio. So the market looked at it and said, it's too expensive. I'll give it a pass. It's basically traded in the same valuation range as it did all the way back then in the '90s. So what's cheap is often cheap for a reason. And if a stock trades at a premium, it's often justified by growth. What happens is that these companies tend to grow into their valuation. So you can see EPS here continuing to rise over the years. And in this case, this chart makes it even clearer. These are the dividends that were paid out over that same period. So had you have bought when it was expensive, or let's say bought in 1990, it had gone up 3, 4 times, and then everyone else was saying it's expensive and this began to get in your head and you were thinking of snatching up profits, you would've missed out on all of this. So it would've repaid your initial investment through dividend distributions alone over that period, never mind the share price growth. Now, this shows the comparison over that period between Pepsi and Coke through to 2024. And you can see that Pepsi, despite remaining expensive, massively outperformed Coke. Don't let valuation get in the way of owning a growing business. If it's still growing earnings, it's very often growing into its valuation. So that's one of the biggest mistakes that retail investors make. And in the city, professionals know very often to not sell a stock just because of the multiple. If everything else is going for it, then you don't sell just because the PE looks high. But we know that things don't always go our way in the markets, to say the least. So most of the time when selling actually crosses your mind, you're down on the trade. And this is where it gets even harder emotionally because of loss aversion. So this is the idea that if you were to be walking down the road and this fell out your pocket and you got home and realized that you'd lost 20 quid, that would piss me off. And according to the studies, the pain of losing £20 would be just as intense as finding double that amount. So that's why loss aversion is so powerful. So let me walk you through the steps to avoid this using the principles that I've applied as a pro and have kept me out of trouble for the most part. This is really just a test of your conviction. And without truly understanding why you bought a stock, which is why tips never work, guys, you won't know whether something has changed with the fundamentals or whether It's just sentiment that's moving the stock price around. So ultimately, this comes back to you having a process and sticking with it. So let me run through a few examples here. This is the screening tool that I have inside of Invest Intelligence, the community. I'll leave a link in the description if you want to check it out. You can get a free trial of it as well. And in essence, what this is doing is scoring a bunch of companies around the world according to the 7 factors that I look for as a fund manager and I look for personally. So the best ones are at the top according to the percentages here, and then the overall score known as the intelligence score. So one of them that I want to begin with is Novo Nordisk. So formally, this was really highly ranking. It was like top 5, top 10 companies. This was a stock that I loved. And I'd owned for the fund as well as personally for a very long time, especially through the pandemic period in the first year or two after. It was one of the best performing stocks in Europe. In fact, it became the biggest by market cap, albeit briefly, because what happened next is that it faced intense competition from Eli Lilly, and then it had the weight loss drugs coming on the scene, which were hit by counterfeiting. So this became a huge problem and led a previously bulletproof, seemingly bulletproof company to have a CEO change, issue profit warnings, which just seems crazy in light of where the fundamental profile was before. Now, of course, this is adapted as I've shown you. It's now 90th, but it was a top 10 quality stock that so many investors owned for many years. So what I want to do is just look at a couple of other examples before showing you the solution. Intuit, the maker of QuickBooks, the accounting software, a company that is still comfortably within the top 10, 6th position here, and it fell victim to the widespread SaaS-pocalypse, software as a service, where that group represented by IGV, the ETF, lost $1 trillion through the end of March. It was absolutely incredible. And whilst there has been some recovery for certain companies, in the case of Intuit, it just hasn't recovered. So this is what you need to implement in order to basically have a sanity check. You probably heard of people looking at 200-day moving averages and things, but what I like to do is on a monthly chart, look at the 10-month moving average. It's the equivalent of a 200-day moving average without the noise or the volatility of looking at a daily interval. As opposed to monthly where it smooths things out more. So that's what the panel beneath represents. It's just, is it above or below this line? When the price falls below the 10-month moving average, that's usually a pretty clear indication for a quality profile stock or compounder that doesn't tend to go below it, that something might have changed. And if you can't see anything, that in itself might just be a signal to hold on. But in this case, there was competition and counterfeiting headlines all over the FT and other Wall Street Journal global news about this. So it was pretty clear that something serious had changed with the company's business model and therefore its future prospects, meaning that the track record didn't really count for much in this period. But from time to time, the general stock market is also going to trade below the 200-day moving average. So what we should really look for is to see whether a company, let's take, go back to Intuit now, is below its 10-month moving average when the market is still above it, because that suggests that the stock market in general is buoyant still. We're still in the bull market, yet this stock is really weak and it shouldn't be a weak stock given the fundamentals, which are of course historical, but given the track record that it has. So this is the clearest indication that something big is going on beneath the surface, and we need to find the reason. So the lesson here, put a 10-month moving average on there. Look at the stock. First of all, if it breaks below, that's usually time to evaluate the position. You could of course set up an alert to do this. If that's the case and the market is simultaneously above Then that really is a question of saying, what's going on here? What am I missing? If it's going down at the same time as the market, it's probably just being caught up as part of the sell-off and it doesn't really mean anything has changed. Now the next step, which I've actually built into that screening tool to make things a bit easier, is to check to see whether there is any AI risk against the stocks that you're looking at. So in the case of Intuit, you can see this column here. Flags that this stock is vulnerable to AI disruption. So if you can't find a clear answer, hold on, continue to do your research, monitor the situation closely. But otherwise, if it's staring you in the face, that's when it's time to sell and to move on. So having conviction in the company is one thing, but what if the whole sector or the whole style has simply fallen out of favor? Well, for that, you've got to look up at the macro, and only once you understand it will you know when you should stick to your process and honor the company fundamentals, or when you need to adapt so that you don't get run over by the 18-wheeler of global macro, as many did in 2022. So the first thing to understand here is that markets are correlated, and they're correlated to macro factors, things like inflation, and interest rate expectations, usually a product of growth. The themes that we saw disrupting the likes of Intuit a minute ago, AI disruption, could potentially be creating these quality traps. So being aware of the themes as well as the economic data are just as important. This is what's driving the rotations we're going to look at in a minute, and that's taking place between not only different sectors but also styles, things like value versus growth, for example. Regardless of the micro fundamentals of the companies in those particular sections of the market. So the first place to start is looking at 10-year government bond yield over the very long term. We had 40 years from 1981 through to 2021 of falling interest rates. All you need to know or remember here is that everything is correlated. So if everything is correlated to rates, the moves were all playing out according to falling interest rates. Now, they reversed, as you can see, bigly, as our dear friend would say in America, in 2022 and going into 2023. So we just saw a complete reversal in many of the trades that had worked for the last 20, 30, or 40 years correlated to that. So let's take a look at some of the rotations that are taking place currently because we looked at Novo Nordisk, for example, and that's broken our rule of being now well below the 10-month moving average. But we are seeing a little bit of life actually come into it here. So is it time to get back into Novo Nordisk? Well, of course, this isn't a recommendation or advice, but this is where the next bit comes in. So there are four corners to this, and the sectors in this case rotate around like a clock. So the ones in the top right are leading the S&P and the ones in the bottom left are lagging the market. So healthcare over the past number of weeks has crossed well into leadership, whereas technology on the other side of that is now underperforming. So given that Novo Nordisk, whilst it's Danish albeit, is a key player within the healthcare sector, Could it be that rather than this being a company fundamental story, this little bounce back is actually being driven by sector momentum where healthcare is just being bought almost indiscriminately? If we go to Cadence or even XLK for the tech ETF, this, whilst it's in the last couple of months, it has made a new record high. It has gone sideways in the last couple of months. And I think once again, part of this reason is owing to what the sector is doing and money coming out of tech. This is something that I've been tracking. Bank of America put out a report saying it was time to take profits and sell tech last month. Also, the only trade in town is actually no longer the only trade in town. And that's the importance of macro fundamentals. If the macro factors are working against you, that's when you should be looking to adapt. Your company fundamentals aren't contributing a great deal. When you've got such headwinds. And equally, if you can catch the tailwinds, you can get pretty lucky without necessarily needing to worry too much about the bottom-up picture. However, if you are a bottom-up investor, so to speak, a stock picker, then there are studies which have shown, especially if you are quality focused as I am, and certainly as I was as a fund manager, You need to give yourself a holding period of at least 2 years for any company in order for the fundamentals to work through. It goes to show how other factors can drive price in the near term, not only sentiment, but also these macro rotations. So now you know when, how, and why to sell your stocks, but why not know what you're buying in the first place? Well, Watch this video next and I'll show you exactly what to look for without any complex analysis or antiques auctions. You make your money when you sell as well as when you buy. See you in the next one.