Top traders thrive through eye for detail
Selling stocks is one of the toughest areas of investing. People throw around scores of sayings about when to sell. But if you followed most, or even a few, of them, you'd soon get yourself tied up in knots.
Means to an end So what should you do? The trick is to remember that success in the sharemarket comes from holding undervalued investments and that buying and selling are just a means to that end. On that basis, you'll buy a stock if: it is within your "circle of competence"; the transaction makes your overall portfolio more undervalued; and it maintains an acceptable portfolio balance.
You'll notice that the second condition is relative. Its answer depends on your assessment of the value of your potential purchase and the value in your existing portfolio - or, more particularly, of the stock you'd sell to provide the funds to make the purchase. You should sell a stock if: it is no longer within your circle of competence; or the transaction makes your overall portfolio more undervalued; or it restores an acceptable portfolio balance.
Opportunities are thin on the ground As the sharemarket becomes more expensive and opportunities become scarcer, cash becomes an increasingly attractive option and your portfolio balance will be improved by holding some.
That's the case at the moment. The market has chased many income stocks up to prices that allow little or no margin of safety.
Limit your banks The banking sector may satisfy all three conditions for sale. Not even the chief executive understands every risk - and don't be fooled by the strength of their brands: these are risky businesses.
The main problem most people encounter is overconfidence in their assessments of value, with the result that they make changes to their portfolio too frequently and leak much of their returns in trading costs.
It's rather like shifting lanes in steady traffic - it feels as though you're doing some good, but you're probably just burning through more fuel. Generally speaking, you're best to get into a decent-looking lane and stay put.
This article contains general investment advice only (under AFSL 282288).
Nathan Bell is the research director at Intelligent Investor Share Advisor.
Frequently Asked Questions about this Article…
The article suggests pruning when the market is strong or at milestones like the new tax year — it’s a good moment to tidy holdings, check valuations and rebalance so your portfolio remains focused on undervalued investments.
Buy a stock if it sits within your 'circle of competence', the purchase makes your overall portfolio more undervalued (improves your margin of safety), and it keeps your portfolio’s balance within acceptable limits.
Sell if a stock is no longer within your circle of competence, the sale would make your overall portfolio more undervalued (improve valuation), or the sale restores an acceptable portfolio balance.
Yes. The article notes that when the market becomes more expensive and opportunities thin out, holding some cash can be attractive and help maintain a healthier portfolio balance.
The piece recommends limiting exposure to the banking sector. Banks can satisfy the reasons to sell — they carry complex risks (not always fully understood even by management), so don’t be lulled into complacency by strong brands.
Overconfidence in valuation leads many investors to change holdings too often, which leaks returns through higher trading costs. Frequent trading can reduce net performance even when intentions are good.
Generally, avoid frequent switching. The article compares constant trading to shifting lanes in steady traffic — it can feel productive but often just burns resources. Find a decent-looking allocation and stay put unless clear reasons prompt a change.
The article’s commentary is from Nathan Bell, research director at Intelligent Investor Share Advisor, and it is described as general investment advice only (under AFSL 282288), not personalised financial advice.
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