When to sell shares and cut losses
Cutting losses is the one thing that separates real investors from the nuff-nuffs – and most people never learn when to sell shares.
Right. 40 years in the stock market and I can tell you there is one thing that separates the nuff-nuffs from the investors. And in this video, I’m going to tell you what that is. And amazingly, I’m going to cure all the nuffs and turn them into investors. There’s one thing they need to learn. Now, I’m going to give you a list of things that are going to progressively make you a better investor. And I can guarantee that by the end of that list, you’re going to do something you’ve probably never done before. Let’s give it a go.
Back in the day, I used to offer a portfolio assessment service. I used to charge $500. Anybody could send me their portfolio. I would assess what sort of investor you are, what sort of mistakes you’re making, and give you some advice on what to do about your current portfolio. One set of portfolios kept coming through with the same error every single time. And you could see it because some portfolios would come through where you could tell this person knew what they were doing. It had some sensible stock picks, probably had some exchange-traded funds, but what it didn’t have was a tail of usually mid-cap, small-cap stocks all sitting in their portfolio at a loss. And this is the biggest failing of every investor. If this is you, it’s not your fault because everybody’s the same. Everybody starts out like this. And what you have to learn to do is to sometimes sell.
I’m very confident that by the time you get to the end of this list, you will be selling – let’s think of a stock that’s done terribly this year – CSL Limited (ASX: CSL). You’d never sell CSL, would you? It’ll be all right in the end. It was fabulous for decades, but now it’s going the wrong way. Once you’ve gone through this list, hopefully by the end you will have sold CSL. Let’s start.
Why losing stocks keep losing
Number one, if a stock’s going down, it is far more likely to keep going down than it is to turn on a sixpence to suit your fantasy that this stock is going to be okay in the end. The trend is not your friend. I’m afraid it’s not an opinion. This is the way the market works. If the stock’s going down, it’s far more likely to keep going down. Reason number one to sell now.
Number two, an early loss is the best loss. The reason people say that is that it’s well accepted in behavioural finance that losses have three times the emotional impact of a gain. Which means that when prices fall, fear triggers accelerated selling. So the further the price falls, the more selling will occur, in which case the early loss is the best loss. So take your losses early. You need to react quite soon. Don’t be one of those people who’ve sat on a loss endlessly and then sell. You are the absolute bunnies in the market that everybody else exploits. You need to take your losses early.
Number three, as any technical trader will tell you, nine out of ten stocks that are going down will continue to go down, but the one that bottoms the day you sell it and goes up is the only one you’re going to remember. And it’s the fear of making a mistake that stops you from selling. And don’t fear the bounce because nine times out of ten it’s going to be the right thing to do, and it’s very unlikely to bounce on you and make you look like an idiot straight away.
Number four, if you sell, you can always buy back. And that is your defence against the fear that the stock is going to bottom the moment you sell it. Because if the narrative changes, if there’s a reason for the stock to go up, well, things have changed, you can make another decision, you can always buy back.
The clarity that comes from selling
Number five, clarity. The moment you sell, everything becomes calm. You’re in the eye of the storm. In fact, hopefully you’re outside the storm altogether. But you get this moment of peace where you can think clearly, unemotionally. Investment is done unemotionally. If you’re sweating because a stock is going down, if you’re sweating on CSL at the moment because it’s blown a hole in your portfolio, in your retirement, then sell it. The amazing bit about it is once you sell, having spent weeks now worrying about the CSL share price going down, you are suddenly going to wake up in the morning having sold it the day before hoping it goes down. And you know what? It probably will because that’s the trend. You need to be in the eye of the storm in order to make clear, unemotional decisions. Selling does that for you.
Number six, ask yourself, if I had cash now, would I buy this stock? No. Your job in the investment world is to put your money into the best investment in the whole world. Do you really think that the best investment is a stock that you already hold, that is going down, that’s trending down? You’ve made a loss that you probably hate. Do you think that’s the stock you should be buying? No. If you wouldn’t put cash into this stock, why are you holding it at all? You need to sell.
Seven. Your state of mind has a value beyond making a loss. It is costing you in other ways. So, if you’ve gone into Friday with a share price falling and you’re losing more money than maybe you can tell your partner about and they’re asking why you’re in such a bad mood? And then the next morning you wake up and you bite the head off the kids because they’re slow getting their basketball uniform, and then you start shouting at the umpire. You know, this is not worth it. If your stock market losses are affecting your mood, affecting your state of mind, having an impact on other people around you, then there’s a lot more value in getting out of the situation than there is in staying in. Look after your state of mind. It has more value than the dollar.
Next, what you paid for a stock is completely irrelevant. The only thing that matters is what’s going to happen to the stock next. If you are anchoring yourself to the price you paid, I remember a client once telling me, “Oh, Telstra owes me $3”. No, it doesn’t. The fact that he paid $3 and it was now $2.50 was completely irrelevant to what the share price is going to do next. Do not fail to sell because you’re hoping a share price goes back to a particular price, which is probably the price you paid, which is the price at which you will no longer look like a nuff. It’s not going to pay any attention to what price you paid. If that’s stopping you from selling, sell.
The excuses investors make for holding on
Have you ever heard the quote, “If you never sell, you never take a loss”? Is that what you’re relying on? I remember in the GFC I wrote an article every Saturday in The Age for about 20 years, and one Saturday during the GFC I’d written this article which said if anyone says to you “if you never sell you never take a loss” they’re a complete idiot. The next Monday morning, this big trader came piling down the open-plan office asking, “What did you write in your weekend column?” Because he the Friday before had sent an email out to all his clients saying, “Don’t worry. If you never sell, you’ll never make a loss”. That is possibly the most idiotic quote anybody has ever come up with in the stock market. And if that’s stopping you from selling, that’s a mistake – you should sell.
Number ten. If crystallising a loss is the reason you’re not selling – because you don’t actually want to admit that you’ve made a mistake, that you’ve lost money – then that too is a mistake. I’m afraid if you’ve lost money, if it’s gone, it’s gone. It’s not coming back, or it’s no more likely to come back because you don’t sell. You just need to sell.
We’ve almost got to the end of the list. Are you still holding CSL? I’ll give you one more reason why you should sell. Because the stock market is supposed to be fun. It’s supposed to be successful, enjoyable, intellectual. It’s not supposed to be miserable. And if stocks are making a misery of your stock market experience, you need to sell them. The game in the stock market is to wake up in the morning excited to see what Wall Street did and whether your exciting investments are going up. Is that really going to be helped by holding on to a stock you hate? By waking up in the morning and being tapped on the back of the head yet again and being told, “You’re an idiot. You’re an idiot. Look at the red number. You’re an idiot”. This is not what you want for your stock market experience. The way to get out of that is to sell. Find yourself some investments you’re excited to wake up to. And almost certainly this loss-making investment isn’t one of them.
Now we’re at the bottom of the list. Are you still holding CSL? If you are, I’m afraid there’s no hope for you. You are a nuff. In which case, you should probably give your money to somebody else, pull stumps, and go and do something more productive because you will forever be not taking your losses. You will forever be holding losses. You will forever be having a miserable experience because you’re holding stocks that are telling you you’re an idiot – and that’s no fun.
If on the other hand you sold CSL halfway through the list, welcome. You are now an investor unburdened by the inability to do 50% of the job in the stock market, which is to buy and to sell. Hope that was useful.
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