sell

Explained: When Do You Sell Your Profitable Stocks?

[Music]

welcome back to another episode of

investing explained

here's today's question

i think first of all i look at a sell

order

as a point where i'm going to have

liquidity and then i have to have some

other opportunity

that's going to outperform what i think

the previous holding is going to do

so if let's just say i own something i

have

a mass of gain and if i sell it i'm

going to have a massive

capital attacks capital gains associated

with it

and so let's just say that that was a

long-term holding so

whatever principle i get from the sale i

now have 15 percent less of that

that's lost due to capital gains tax

when i employ that new capital what kind

of return

am i expecting to get out of that and

then when's it gonna

basically exceed the previous holding or

the previous

valuation that i had for the other

business as far as return goes

so that's kind of like the mathematics

behind my thinking whenever i do

exercise a sell order another time that

i'll sell

that doesn't follow that model is if i

think that there's just something

fundamentally

wrong with the business and i think that

there is

some type of issues and i just want to

liquidate the position

so that's typically because there's

impairment on their balance sheet for

one of their major assets that i think

there's some competitor

that's come in is going to basically

take all the market share and it's going

to

cause a lot of punishment for the pick

so those are kind of the two

main ways that i look at it now how do i

manage

some of that risk if you asked me 10

years ago i would tell you that what i

just described is was exclusively how i

look at

selling positions today i would tell you

that i also incorporate

the momentum status of our you know we

have a momentum tool on our tip finance

one of the nice things about this

momentum tool is it looks at statistical

volatility ranges

of a pick any pick and it's tailored

towards that pick

so like let's say the s p 500 is going

up it's going within a certain

volatility range and then whenever it

steps outside of that volatility range

the momentum tool says something's

different this

is most likely going lower because it's

outside of this trading volatility range

and then it turns it into a red status

so the way that the tool is working is

it's basically

selecting a stop limit for that

underlying pick

and that stop limit is dynamic and so as

the price goes higher and higher

the stop limit keeps adjusting higher

and higher and so i use that tool

especially for indexes i use that tool

because

it's really hard to come up with an

intrinsic value for the s p 500 outside

of just looking at the price to earnings

and so

my opinion is that if the price goes

through that volatility range and hits

that stop limit on an index

it's more macro related than it is

earnings related or

functioning of the business so i use

that to also assist me

in knowing when to stop holding a winner

and so for example like the s p 500 on

our tfp momentum tool the thing has been

green for

a very long period of time and it

recently went red

and then it just went back into a green

status so there's a tax realization to

that but there's also

the the implication that i'm protecting

my downside risk

because if the market would crash 40

percent

in a day which you had in 1987 or some

other

events that were very deep you're

protecting yourself from those types of

events so i would add that in there as

well as a

way that i also protect my downside risk

and that i continue to hold winners that

just keep on running

i really like the question too and

actually i would like to put into the

mix

a few fun facts about buffett before i

go into my own strategy which is very

similar to what you also described there

before

preston but i think buffett is one of

the best example of not selling your

winners

the vast majority of buffett's portfolio

it's concentrated in just a few

companies

including american express apple bank of

america

and coca-cola which is a very famous

example of a position that's worked out

really really well

and all the investments that i just

mentioned before they have been very

profitable

and aside from the apple acquisition

that was initiated back in 2016

it all sucks that he has held for a very

long time

now i really agree with that sentiment

because in the sense that i really

sell my winners too generally jumping in

and out of winners windows hard and if

you find

really good stocks that are compounders

you don't want to jump in out of it too

often

part of it is tax as president mentioned

before if you live in the us that's 50

so in that sense you just have to be

more right than wrong

so really to sell your winners it has to

trade a lot higher than intrinsic value

so say

a company like in berkshire hathaway

trading 172 today

like if that was going to 300 tomorrow

like yeah

clearly i would take the tax loss i

would take the tax on that and sell my

position

but the more capital gain that you have

earned the harder it simply becomes you

know

coca-cola being example like i mentioned

before buffett built that position

for 1.3 billion dollars and i think the

last time i looked it up it was

trading around 18 billion dollars so

it's a lot of

tax he has to pay even though the cocoa

at times have been

quite expensive it just doesn't make any

sense

stick i just have something i want to

add on to what you were saying there

real fast so

with the example that you provided with

berkshire hathaway's price let's just

say it doubled

in the past 10 years ago i would have

said yep let's sell it let's move it

into the other

undervalued picks that i have and then

if the price comes back down to where i

think the valuation is then i'll start

re-accumulating it

today i would tell you if the price

doubled i would continue to hold it

until i would see the price volatility

go

below the stop limit just because

maybe the market is going to continue to

i mean you saw this with tesla where the

price just went crazy it went up to like

600 bucks and i'm like

this is maddening right like this price

is nuts

and then it ran to a thousand so if

you're using a momentum

indicator for your point where you're

going to exit the position that just

keeps

running you would have continued to hold

tesla it would have gone up to a

thousand

and then when it started to drop back

down call it at 800 or

700 or whatever it was your stop limit

hits

that's when i would sell is i allow it

to keep running because i have no idea

how much

fear of missing out the market's going

to price into that run

but then i rely on that volatility range

to help me know

when it's time to pull out of that and

then go into the other

undervalued picks that i'm finding on

the market it's really unfortunate that

you

talked about tesla cause it really had

like an interesting segment about

the inefficiency of the stock market and

whenever we now have primed everyone to

thinking about tesla

i don't know if i can really bring my

point back home with that

but i guess my point is that the market

is

relatively efficient at least over time

it has proven to be and so whenever i'm

saying that

and using that as my premise and please

forget everything about tesla the

president just mentioned

whenever i'm doing this segment here but

sometimes whenever you do invest in a

stock and it goes

south like really really south that

momentum can really save you because

guess what you can be wrong like you can

be wrong and sometimes whenever it drops

50 or 60

that's not because the market is

terribly inefficient that's just because

you're wrong you're just analysis your

facts were just wrong

and that's why i think it's so valuable

looking away from tax here

that you have some sort of tool that can

go and say

hey you might be right the whole world

might be wrong

but you might want to take two seconds

and

reconsider perhaps you are wrong and

perhaps that's the time when you need to

get out of that stock

this is a really simple math exercise

that i think many investors don't

understand

if the price goes down fifty percent now

you need a hundred percent gain

in order to get back to neutral to where

you were and

the way markets work is it's almost like

if you went and you had to destroy a

building

you can push a button and the whole

thing just falls apart really fast

but if you're going to reconstruct it

and build it back up like you see these

stadiums that they explode that they get

rid of

it happens in an instant you can destroy

things in an instant

but then to rebuild it it takes forever

and so

that's one of the other reasons why i

really like the stop limits

on momentum is because it takes a lot of

the emotional piece out of it

that you naturally have when you buy a

company and it's just saying hey

statistically there is something that's

different right at this point in time

there's something that's different so

you can either

keep following your emotions or you can

just look at it from a mathematical

standpoint and protect your downside

so that you're not having to rebuild in

the event that you're wrong

and that rebuilding might take five

years in order to get back to

neutral right or you can just you can

take a

systematic loss and move out on your

next pick

and protect your downside risk so when

buffett has his

rules of rule one don't lose money and

rule two refer back to rule number one

i think the essence of that statement is

this idea that when you have a 50

downturn it takes a hundred to get it

back or if you have a 30

downturn it takes x to get it back which

is way higher than 30 percent

so that's important for new investors i

think many new investors don't

understand the implications of that

especially if you've never lived through

a significant downturn

that's it preston i will continue

explaining investing

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