Portfolio management

[ZZF]

Hi Buddies,
 
Appreciate if anyone can share some thoughts.
 
Say I have a high conviction stock A at 10% weightage. I have 29 other stocks that adds to 80% (2% to 4%), leaving 10% as cash.

I have decided to sell off stock A due to very drastic change in fundamentals - It will be a painful loss. At the same time, I have identified a new stock B to get into. In this case, all else being equal, I will simply cut my losses and build up a position in the new stock B as the price of B is currently cheap to me.
 
The dilemma is this:
 
Stock A generally trades on thin volume. Say the last done for Oct to Nov 2018 has been 1.00, with buyers 1.00 and sellers 1.05. Theoretically, still can slowly cut over time at 1.00, judging by volume done at that price for previous months.  Now, market's overall volume became thinner in Dec 2018. All else being equal, I attribute the change in buyer's price to liquidity.  Price of stock A is now 0.85 vs 1.05. Big difference - OK, I exaggerate a bit but you get the point.
 
Ideally, I would like to keep 10% cash as a buffer.

Do YOU:
1. cut at 0.85 and switch to stock B ?
2. use remaining cash to switch to B and wait for better price to cut A? What if A tanks further?
3. wait for price of A to rebound a bit before selling to switch to B? what if B price goes up in the meantime?

[karlmarx]

The decision largely depends on how much you hate stock A and how much you love stock B. I have taken the liberty to add an additional option for you, but if I were conservative in my approach, I will choose option 1.

Option 1:

If by "very drastic change in fundamentals" you mean that the stock's long-term value is not even worth half of the current bid price, then you should not hesitate to sell now. The risk here is that the market may offer a better price when general sentiments recover.

Option 4:

If you want to buy stock B now without selling stock A, you can use financing; from your broker or other sources.

The risk here is that general market sentiments remain weak (or get weaker). This results in even greater difficulty to sell stock A, and greater emotional stress from seeing the value of stock B -- bought with borrowed money -- fall.

But if the market were to rise soon after you purchased stock B, you will have less difficulty unloading stock A (possibly at a better price) to pay down your loan.

Unless you are very sure of your ability to repay, you should not borrow.

[opmi]

Hi Buddies,
 
Appreciate if anyone can share some thoughts.
 
Say I have a high conviction stock A at 10% weightage. I have 29 other stocks that adds to 80% (2% to 4%), leaving 10% as cash.

I have decided to sell off stock A due to very drastic change in fundamentals - It will be a painful loss. At the same time, I have identified a new stock B to get into. In this case, all else being equal, I will simply cut my losses and build up a position in the new stock B as the price of B is currently cheap to me.
 
The dilemma is this:
 
Stock A generally trades on thin volume. Say the last done for Oct to Nov 2018 has been 1.00, with buyers 1.00 and sellers 1.05. Theoretically, still can slowly cut over time at 1.00, judging by volume done at that price for previous months.  Now, market's overall volume became thinner in Dec 2018. All else being equal, I attribute the change in buyer's price to liquidity.  Price of stock A is now 0.85 vs 1.05. Big difference - OK, I exaggerate a bit but you get the point.
 
Ideally, I would like to keep 10% cash as a buffer.

Do YOU:
1. cut at 0.85 and switch to stock B ?
2. use remaining cash to switch to B and wait for better price to cut A? What if A tanks further?
3. wait for price of A to rebound a bit before selling to switch to B? what if B price goes up in the meantime?

Keep it  simple.

1. If things at A changed so much that make you change your conviction, then just get out of the position. No need to wait. If got buyers, just sell. 

2. Whether to go into B or not, compare the expected returns for the existing shares in your portfolio. If the current shares is better than B, then why not buy more of existing shares? Rather than to get into a new thing.

I personally prefer concentrated portfolio. eg. my CPF portfolio only has 1 stock.

BTW conc portfolio of illiquid small caps with margin financing is asking for trouble..hahaha..

[chialc88]

A) Will I cut loss?
Just a gentle reminder that most of us will have the instinct to postphone the need to cut loss.

Is this applicable to you too?

Just be mindful and be a bit more assertive to cut loss 
    (as your instinct will ask you to avoid cut loss)

B) MY BUY PRICE
Another reminder is we always anchored on our buy price.

The fact is our buy price has nothing to do with the buyer of our stocks (that we are selling to).

So, why is our buy price so important when we are selling lay?

C) MY SELLING PRICE
Certainly, selling at 0.85 sucks big time.
Selling at 0.9 also sucks.
May be 1.00 is better.
Best is 1.05.

None of this matters if you don't need to sell.
If you need to sell, then just sell and don't hope for better price (because it could be worst too).

Last but not least, if I were you, I will sell and accumulate 20% cash (aka hold off buying B).

Merry Christmas and hope you have some time to enjoy a well deserved holiday.

[corydorus]

If there is no good probability that Stock A will return to the price you willing to sell, chances are it won't if fundamentals changed. It would return for some cases but that is not because you want to sell at the price. There is no correlation between sell price you wanted and the price it may rebound.

Instead if you have learn from the mistake, you would have chose a better stock which have a better chance to go higher. The option could be cash as well since not losing more money is a protection of capital.

That's how I usually psycho myself.

.

[ZZF]

thank you all for sharing, esp the one by corydorus.

Following up on this -

If one do not have any edge in market timing, one may be inclined to be as fully invested as possible (to the extent you can find cheap / good and cheap stocks) at any one moment. We are nowhere near 2007 levels of valuation, at least in last 10 years for SG market, so it is very possible to be 80% to 90% invested.

Now, assuming you have spare savings every now and then, allowing you to continually invest more in the markets. Wont you be caught with your biggest quantum of investments right when the market turns for the worst? This is assuming our best stocks have not reached their ideal target price (hence no selling ) and market sentiment dragged them down. Hope I am clear here.

Any thoughts from Karl, opmi, chiacl, cory and other VBs?

[karlmarx]

thank you all for sharing, esp the one by corydorus.

Following up on this -

If one do not have any edge in market timing, one may be inclined to be as fully invested as possible (to the extent you can find cheap / good and cheap stocks) at any one moment. We are nowhere near 2007 levels of valuation, at least in  last 10 years for  SG market, so it is very possible to be 80% to 90% invested.

Now, assuming you have spare savings every now and then, allowing you to continually invest more in the markets. Wont you be caught with your biggest quantum of investments right when the market turns for the worst? This is assuming our best stocks have not reached their ideal target price (hence no selling ) and market sentiment dragged them down. Hope I am clear here.

Any thoughts from Karl, opmi, chiacl, cory and other VBs?

What you are really asking is how to time the market.

If you base your buy/sell decisions solely on what you think the price of the stock might be in the near future, I'm afraid that there isn't much I can add. My expertise in this aspect is regrettably zero. 

But if you base your buy/sell decision on valuations you have done (of any stock you're looking at), and assuming that your valuations are not wide off the mark from the 'intrinsic value,' you will not have to time the market; because you will know when a stock looks more cheap or more expensive. In WB-speak, you need not be precise in telling a person's weight, but should be able to tell whether a person is fat or skinny. 

If you don't have the answer to whether the stock you're looking at is more cheap or more expensive, then whatever decision you make will likely be based on your emotion, or your perception of the stock's direction, and then supported with loose explanations. This is what most people do; they don't look close enough at their companies, and just rely on general information to make decision. They will rationalise their buy/sell decision with loose explanations such as, "trade war will be worse next year, better sell first," or "trade war will eventually be resolved, there's nothing to it, just buy," or "interest rates are rising, better sell," or "interest rates are rising, but economic growth is still intact, so still can buy," and so on. Most of the time, whether interest rates rise or not, or whether trade war actually cause more pain or not, does not change a company's long-term value. In the case that it does -- and there can be many -- that a company's very fortune is almost entirely dependent on, say, interest rates, you should probably be very wary about buying them anyway. Margin of safety does not just mean buying at a 'low' price, but also distancing yourself from companies whose business models are vulnerable to the kind of shocks that are highly-probable and fatal.

If you have the answer to whether the stock you're looking at is more cheap or more expensive, then you will be more confident in your decision making. If you think stock A is utter junk worth 0, dump it. If you think stock B is only selling for a third of its future value, buy it. It really is that simple. Our monkey mind plays tricks on us by telling us we can buy it cheaper later, or sell it more expensive later. Sometimes the monkey is right, and sometimes it isn't; just like a coin flip. The key to better than 50/50 odds -- and therefore higher odds of a positive return on your portfolio -- is to make the decisions based on sound reasoning supported by evidence, and ignore the monkey.

Given that you have cash inflow every now and then to invest, you should have even less reason to be worried about not buying at the lowest. Trying to buy at the lowest is stressful, and mostly unproductive. Nobody fills their cups to the brim. It is totally alright if you did not buy at the lowest.

[chialc88]

buddies, everyone circumstances is different.
our temperament also differs.

you had a unique situation that every now and then cash inflow to invest.

if I am not mistaken, your best strategy is actually waiting patiently for the market to crash and then mop up those undervalue stocks with huge MOS.

2007 is a good example

we are currently nowhere near 2007 aka need to be more patient

market is rather volatile at this moment

by the time, when companies start to report weak numbers (affected by tradewar),

the downtrend will be more obvious

not sure it make sense continue to be fully invested or 80% or 90% now

Given time, and assuming downtrend continue,
when you need the money, you will need to sell (at a lower price due to lower volume/demand)

Lucky for you, your cash inflow is secured and 
I suppose you are not forced to sell

---

Back to sell rule.
For me, I have a few criteria to own a stock.

These are mandatory criteria aka if any one of them failed, the stock is out.

So simple.

For your case, you probably need to decide whether A deterioration is acceptable.
If yes, nothing need to do (as you don't need the money).

If not, just sell, there is no need to hope for the price to go up.

As for buying stock B, you got my answer, 
don't you?

Enjoy and you're a lucky fellow.

[money]

thank you all for sharing, esp the one by corydorus.

Following up on this -

If one do not have any edge in market timing, one may be inclined to be as fully invested as possible (to the extent you can find cheap / good and cheap stocks) at any one moment. We are nowhere near 2007 levels of valuation, at least in  last 10 years for  SG market, so it is very possible to be 80% to 90% invested.

Now, assuming you have spare savings every now and then, allowing you to continually invest more in the markets. Wont you be caught with your biggest quantum of investments right when the market turns for the worst? This is assuming our best stocks have not reached their ideal target price (hence no selling ) and market sentiment dragged them down. Hope I am clear here.

Any thoughts from Karl, opmi, chiacl, cory and other VBs?

i think it is okay to stay invested, as long as you are confident that you are buying the companies near or below their intrinsic value. 

More importantly, since you are still working, if the market goes down, then make it a point to squeeze out more savings from your salary to invest in stocks. I did this during 2009 to 2012, i was hoping that the market stays as low as it can while i continue to work to collect more income to channel into stocks. My stocks are probably underwater during that period, but it didnt really matter to me, what matters is putting more and more money into decent companies. During that period, for the ratio of my stocks to cash ratio is probably 9:1 or even 19:1, i hardly have much cash lying around

That said, the valuations now are very different, the recent drop in the US stock market has made some companies more attractive. My stock to cash ratio is about 1:1 now.

[Kaimin]

The deeper question OP is asking is when to buy or sell a stock after it's intrinsic value has been calculated. The basic principle of value investing in stocks is to buy when a stock trades below it's intrinsic value and sell when it's above it's intrinsic value. But what should an investor do when a stock, which was intelligently valued at trading below it's intrinsic value, advances considerably but is still below its intrinsic value? Using the principle, the correct choice would be to hold. But say the investor comes across some more money to invest, either through income, selling other stocks or having some cash at hand. Should he buy more of the stock, now that the margin of safety has shrunk considerably? If we strictly apply the principle, yes, it would be logical to buy more of the stock because it's still undervalued. 


But there's a big problem here. A margin of safety implies a large disparity between price and value - Graham puts this at around 66%. So it wouldn't be value investing to buy more of the stock if it was trading at 97% of its intrinsic value. Or 93%. Or 89%. You argue this is just a sort of continuum fallacy - that just because we cannot put a precise number on when a security has a margin of safety or not, the value investing theory is invalid. This isn't true, and Graham have the analogy that you don't have to know an obese man's weight to know that he should go on a diet. But now we face another question - should we sell at these levels? 

Or in other words, if we are unwilling to buy more of a stock, should we sell what we have in it? This is a logical move because at this point in time, whatever money you already have in the stock or will put in a stock would yield the same returns in the future. So if it is profitable to hold a stock now, it is equally profitable to buy more of it now (commission fees would just be a price factor, i.e. if there's a sales commission of 0.25%,it would be the same as the market price being 0.25% lesser). If we apply the above two deductions from the above paragraph, we not only insist on buying stocks with have a large margin of safety, but sell when this margin of safety shrinks considerably and put it in another where a large margin is still there. This would mean in practice that we constantly shift our money between a group of undervalued stocks on your radar, moving into those which at the time the market undervalues the most relative to the intrinsic value. Thus our margin of safety is maximised.  

Yet this would be disastrous. Trying to maximise your margin of safety would in practice destroy your returns. You would sell your stock when it advances by between 5-10% to put it into another more undervalued stock which the market still hasn't picked up on, limiting any potential for substantial profit. Your portfolio would be a bunch of unpopular stocks which the market might take months or years to value correctly. Occasionally you'd be wrong about a stock and the business is substantially worse than you thought, justifying its low price and even making it go lower. At this point to maximise our margin of safety we would definitely sell our stock instantly, unless the decline in price was so great that even with these worse fundamentals, the stock still trades at a margin of safety as large as the largest few in our group The only in one (very unlikely) situations, you'd profit well. The is if your group of undervalued stocks as a whole simultaneously or successively increase in price to their intrinsic value or higher. This could in practice happen if you know only a few stocks which are undervalued, so even when you periodically switch to the most undervalued stock, you still make a handsome profit. But this is a ridiculously unlikely if you know any significant number of undervalued stocks. 

There are two possible resolutions to this paradox. The first is if you add to the theory of value investing an element of market speculation, which can be summed up as "Once an undervalued stock has been recognised, the price is likely to advance more quickly than one that isn't." So between a stock that is trading at 66% which has been going sideways for two years and a stock trading at 80% of intrinsic value which has recently gone up sharply because the market is revaluing it, you would buy the latter. You would then sell when the price matches, or exceeds, the intrinsic value. So maximising your margin of safety is the secondary goal, and the primary goal is to through a mix of fundamental analysis and reading market sentiment maximise, profit from a near term advance in an undervalued security. If we apply this theory to OP's problem and to replies in this thread about looking at the fundamentals at the stock, if stock B is not anticipated to be revalued to its intrinsic value by the market in the near term, the margin of safety should be maximised with regards to stock A and the group of undervalued stocks he is monitoring. I'm assuming from his language that stock A does not have a significant margin of safety, so he should sell his stock A and put it into a stock with a large margin of safety, which I also assume is stock B.

The second is a more long term, Lynch and Buffett-esque approach to investing, where the margin of safety is a different kind of margin of safety - a long term economic moat. Instead of a disparity between price and value to protect your capital, this margin of safety guarantees the future earning power of the company. This is the primary goal, to buy the companies with the greatest moats and long term profit potential, while the secondary goal is to find a disparity between price and these moats. With regards to selling, this investor sells any company that does not have these moats. So you would sell stock A and buy stock B also.

With regards to cash, the question is much simpler. Cash for investing itself should never be held. Singapore Savings Bonds or money market funds are highly liquid assets that can be redeemed into cash in a month or less. Unless you're holding cash for a stock you're about to buy, you should never hold cash. Cash doesn't just give you no returns, inflation gives it a negative return of about -2% each year. But if you're asking whether securities like short term bonds, long term bonds or stocks, over the very long run - several decades - stocks will return higher than bonds by a considerable amount. But if you put in at the wrong time, your returns could be mediocre for many years. Dollar-cost averaging of stocks is the best way to approach stocks - it evens out the yields to the long term 8-11% rate and is less mentally distressing.