How To Sell Your Stocks

Just after New Year, an amazing paper was posted on SSRN called “Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors.” A few days later, Matt Levine, who writes daily for Bloomberg and whom I read almost religiously, published a terrific column about it called “Investors Have to Sell Stocks Too.” They’re both worth reading in full. But I’ll tell you about this new research in case you don’t feel inclined to navigate away from this page.

Basically, the paper found that professional investors—portfolio managers—put a lot of thought and effort into what stocks to buy, and they’re very good at choosing them. The stocks they buy tend to perform much better than if these managers had simply picked stocks at random. However, when it comes to selling these stocks, portfolio managers basically have no idea what they’re doing. If they had just trained monkeys to throw darts at their portfolios, they’d perform considerably better. How much better? By over 1% per year. And that really adds up. Training monkeys to throw darts is considerably cheaper.

Portfolio managers tend to sell stocks based on astrology. Just kidding. Actually, they base their decisions on price performance, which is almost as bad. The study shows that stocks that have performed extremely well or extremely badly are those most likely to be sold (actually, 50% more likely!). This is the exact opposite of what these managers do when they choose stocks to buy. When buying stocks, portfolio managers look at the fundamentals, not at price performance. But when choosing which stocks to sell, fundamentals go out the window. Instead, these managers seem to rely on silly heuristics like “sell your losers and let your winners run” or “sell if you double your money” or “sell your most volatile holdings.” It doesn’t take a lot of savvy to realize that these “rules,” if strictly followed, would rather quickly bankrupt almost any investor.

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Disclosure: My top ten holdings right now: ARC, PCMI, RLGT, GSB, LNTH, KMDA, CTEK, PERI, SCX, CLCT. CAGR since 1/1/16: 41%.

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