Tom Gardner: Hi, Fools! Tom Gardner here with Morgan Housel, a long time Motley Fool contributor.
It's time to talk, when to sell? It's not something that we frequently talk about at
The Motley Fool, because we're so committed to buying.
Morgan Housel: As we say, for good reason. Gardner: And to being a very long-term owner
of the businesses in your portfolio. But there are reasons to sell, and I've got a handful.
And, Morgan, I think you're going to be like the assassin here. You just have one reason to sell.
Housel: And it's definitely the biggest reason;
I don't know if it's the only reason. But to me, the biggest reason is just whenever
you need the money. Rather than saying, I'm going to sell when the stock reaches X dollars
or when it does this or if I think it's overvalued or undervalued, I would just sell when you
need it. When you need the money to retire or to send your kids to college, whatever
it is. I think if that's your goal, if that's just the baseline expectation, I think there's
a lot of evidence that that's the best way to invest. That selling good companies or
selling any companies, on average, is detrimental to your long-term success.
Let me give you a quick example of this, the S&P 500 is made up of 500 companies.
Those companies are rearranged every few years; some are kicked out, some are brought back in.
If, over time, there's just been no changes to it whatsoever -- the people at S&P 500
didn't kick anyone out, didn't bring any new ones in -- the index would have done much better.
Just the constant getting rid of things that you don't think are working anymore tends
to be a bad thing that works against you over time. So, I think just leaving it alone until
you need the money is a better way to do it. Gardner: Motley Fool Stock Advisor, the data shows,
since 2002, when the service was launched, if we had never sold a stock -- going back to 2002 --
we would have better returns overall. And the returns are market-smashing returns;
but we would have had better results. Why is that?
Housel: I think it's because the companies that you're tempted to get rid of are often
companies that are cheap, and cheap companies tend to go on and do very well. That's broadly
why it is. The companies -- you know, most people don't get rid of companies in their
portfolio that are doing very well. You know, it might make a lot of sense intuitively to say,
“I've made a lot of money on the stock, let's sell it, let's lock in the gains,”
but that's not what people tend to do. They tend to sell the losers. And the losers tend
to be -- if you take a value mindset, those tend to be the stock that have a high return
potential going forward. Gardner: I will add to that, that I think,
all it takes is selling one or two future big winners too soon that you can't possibly
catch up with what you lost by missing out on a 10-bagger, it's very hard to catch up
with other intelligent sells. So, it's better to just collectively hold to all of them.
I'll add a few 'when to sell?' rules to your great one. And one of the reasons I really
think that that's a great suggestion, Morgan, is because it's personal. Which is I think
the first way that people should think about selling, is a more personal question.
Don't get too wrapped up in quarterly earnings or is the CEO leaving or what's happening in
the business? Do I believe in this anymore? Start from a very personal place -- No. 1,
do I need the money? No. 2, is this position in my portfolio too large?
So, certain situations along the way, we end up with a 100-bagger Netflix and it
becomes more than 20% of someone's net worth. And I think at that level for me, I would
start to begin to think about selling incrementally, portions of it, because as much as it's great
to see things run, if they become 50% of your net worth, 70% of your net worth, it actually
can take over your mindset in life and become too front-and-center for you on a daily basis
and cause you to look too closely at it. So, for me, 20% to 25% of your net worth in a
single stock, that's a time to think about paring it back.
A second is, when it's simply too small of a position to really be meaningful. At a certain point,
as some of your companies have gone on to do extremely well; you're a long-term
five- to ten-year minimum holding period investor with us at The Motley Fool, some of those
companies just have drifted down into absolute irrelevance; they're 0.03% position in your
portfolio. And I think at a certain point-in-time, you might want to collect those together and
wrap them into a 3% -- ten of them into a 3% or 5% position that you really believe in.
So, a little bit of a cleanup in your portfolio; particularly with transaction costs down at zero.
My third reason, which is also personal;
and then I'm going to add a business reason. So, my third reason is, you're just not interested
in the company anymore. You don't really enjoy following it. I don't think you have to be
reading about these companies every week or every month -- if you miss a quarterly report,
whatever -- you can look at your companies every year, every two years, every three years.
I really believe that. I think it should be fun for people, but if there's a company you're
just not interested in anymore, you should remove it from your portfolio.
So, we've got those four first rules: 1) If you need the money. 2) If it's too large of a position.
3) If it's too small of a position, and 4) If you just aren't interested in it anymore.
And the fifth one is, I think, if you think
there's a plausible case for this business being disrupted. I think that the pace of
technological change is so great that once a company falls behind enough, the problem is,
the stock will probably be down 30% or 40% already, at least from its highs,
but if you're looking at the company and you're thinking this is a future JCPenney. I just
don't see consumer behavior or businesses needing this solution anymore because something
new has arrived, the platform upon which business is being transacted has changed and this company
will not be able to make it across the river. So, that will be my one real business-focused reason:
if I think this company is going to be disrupted. Even that can be hard.
All-in-all, I think we both agree, I think you'll get better results if you never sell,
but obviously, if you don't have income coming in and you want to invest in something new,
those would be some places that I'd look to sell your stocks and reallocate back into
your favorite businesses. Thanks, Morgan! Housel: Thanks, Tom!