Reader Question: How often do you sell positions?

Earlier this week I was speaking to a friend about his portfolio and some options he was considering taking to reduce volatility. Put simply, he wanted to sell out of a number of positions which were rapidly declining, move into cash and then buy in again at a lower level. When I asked him why, he said;

“The companies are still good companies, but the market is just crushing my portfolio. In the last week I’ve gone for being 15% up for the year to nearly making a loss. Unless conditions reverse, all the gains I’ve made in the last twelve months will be totally wiped out.”

I asked him one simple question. If the companies are still good companies, then why do you want to sell your share in them? Out of the thousands of companies available to invest in, I hold less than 1%. Of my entire portfolio, I probably sell 15% of positions in a year – usually less.

Once I’ve bought a company, I usually sit there and do nothing with it. Dividends trickle in, the stock price flies around (usually in a fairly unpredictable manner in the short-term) and I keep an eye on the latest news about the company. Some weeks, the market is in a buoyant mood – the price creeps up and up and up, and other weeks, it’s in a catastrophically bad mood, and the price slides and slides and slides. Through it all, I simply watch my company.

How is it performing? Does it still have a strong balance sheet? What is revenue doing? How about profits? How are competitors faring? What does the general market look like?

If the answers to the questions are favourable, then odds are that over the next five to ten years, the share valuation will climb, dividends will increase and my portfolio will benefit. So why would I sell out of that company when the whole market is having a panic because an orange cheeto in a suit decided to tweet some lunatic statement?

Some of my best investments have gone through prices collapses – in fact, I don’t think I’ve got any publicly listed investments that haven’t! Some of my biggest holdings have been underwater by 15, 20, even 25% in the past before coming back to dominate my ‘best buys’ list.

The odds of me selecting winning stocks are tough to begin with. Studies have shown that most active traders fail to beat passive indexes. The more investments I chase, the more likely I am to pick a stock that fails to keep up with the index, let alone beat it. But if I’ve got a winner, why would I sell it just because it has a bad quarter or a bad year?

This is why I hold, hold, hold. Cash can pile up and I’ll still sit around and do nothing with it if I can’t find an investment that fits my investment criteria. The world can tell me that Amazon is going to take over retail and that Tesla is going to go to the moon. It can tell me that infrastructure investing is the next big opportunity and that I should move into gold and sell all my London-based holdings because of Brexit.

Still, I will continue to hold. Dividends trickle in and my portfolio grows. Share prices go up and go down each week, but experience tells me that over time, the majority of my holdings will increase if I’m stringent about following my investment criteria and actively working to drive out the weaknesses.

Sure, when I check my portfolio mid-week and see red across the board, my mouse might drift towards the sell button, but it always drifts right past it. So in answer to your question, how often do I sell positions, my answer is rarely.