Selling Is Harder Than Buying

Ian Cassel Blog, Educational 10 Comments

I really enjoy meeting investors face to face. A couple times per year we try to have MicroCapClub member meetups where those that are interested get together and just talk stocks for a day or two.  We just had one of these events in Idaho, YES, Coeur d’Alene, Idaho. There is nothing quite like sitting around with likeminded investors telling stories and pitching ideas.

One evening a few of us got on the subject of “round trippers”. These are stocks that you’ve ridden up and the whole way back down. There are a slew of microcaps that make big gains, but many of them come right back down. They are some fad or momentum stocks that for a few weeks or months get thrown into the spotlight. “Round Trippers” happen to everyone, and they’re part of the learning process. I’ve been lucky and really have only had one really bad experience with a round tripper.

I’ve tried to bury the memory of this investment, but it was in 2006. The company was Charys Holdings and the overview of the story is HERE. My cost basis was around $1, and literally in two months it went to $11. Then I road it down, and down, and down, and down and sold for a loss. At the peak I was up $1 million, and several months later I took a $50,000 loss. Another MicroCapClub member, a very successful microcap investor, told a similar horrific story from the mid 90’s when he was up $35 million in a position and road it the whole way back down.

There is no greater motivator or educator than experiencing loss.

The Psyche of Selling: Selling is harder than buying, so when and how do I sell?

First and foremost, I try to know my investments better than anyone else.  This helps me to initially buy, to hold, and to sell.  My position sizing might be unorthodox to most as I normally hold several days to several weeks worth of volume. When I know a company and especially the ancillary forces (industry, consumer tailwinds, etc) better than anyone else it gives me an edge. This edge might give me minutes, hours, or day’s advantage over anyone else. Being on the front lines has given me unwavering conviction to hold multi-baggers and also the ability to spot changes quicker than others and sell before the masses.

Your “gut feeling” is normally right because it’s the sum total of all your perceptions.

When you know you should be selling it’s normally too late. Through the years I’ve found that when I start to see cracks form in my investment thesis, I should be selling. When I start thinking about selling, I should be selling. When I start to rationalize holding a position, I should be selling. When I feel management has lied to me, I should be selling. Listen to your gut.

Over-Confidence is the only emotion or state of mind that helps me as an investor, and it’s not for the reason you might think.

I’ve said this in other blog posts, but when I start to really get over confident, basically when I turn into an asshole, I need to start selling. Several years ago when I was vacationing with my wife and in laws, a position I was in was up 1000% in 6 months. I made some sly remark to my wife one morning at breakfast in front of her family. My wife said, “Ian, don’t be a dick”. I immediately went and sold half my position. Two months later the stock was down 60%. Believe it or not, but my over-confidence has pin pointed some amazing exits over the last several years.

When you’ve spent months or years in an investment being bullish, once your brain switches to the sell side, you’re mind almost becomes divorced from the stock.  I’ve found that once I start selling a position it’s hard to stop selling it.

Rules for Selling

I’ve never had a fixed set of guidelines for selling based on stock price. I really don’t have rules such as: I’m going to sell half once a stock doubles, or I’m going to sell my position if the stock drops to X price, or when XYZ stock goes over 10% of the overall portfolio I’m going to sell it down to 8%.

For my strategy, it’s just a waste of time to have such rules because my position size will ultimately grow with my confidence level. Just because a stock doubles or triples doesn’t mean it’s a sell. I’ve been in many stocks whose situations were far better and even less risky after their stocks doubled.

Here are four reasons why I would sell:

  1. Sell when you find something better. You want to always evaluate new opportunities against what you already own. When you find an investment that is much better than a current investment you sell.
  2. Sell when the story changes, and I try to know the companies better than anyone so I can spot the changes before anyone.
  3. Sell at the first sign of management incompetence or unethical behavior. Sometimes management teams make a decision that is so bad you have to sell. The reason is because of the cockroach theory. When you see one bad decision there will be more that follow.
  4. Sell when the company gets very overvalued.  I’m a long-term investor but there are cases where the stock price gets way too far ahead of the business. Evaluate the current valuation against your three or five year expectations-estimates.

How To Sell

I always TRY to sell on the offer and into strength, but the reality is not every stock you are going to want to sell is going to go up and to the right.  So lets divide this up into two groups, selling winners and selling losers.

Selling Winners (stocks that are going up)

If I own 100,000 shares of a $5 stock and I’ve made the decision to sell, I normally use limit orders and might sell 1,000 – 2,000 shares every 0.10 up from $5.  The greater I feel the gap is between expectation and reality the more quantity I will sell. I don’t like to sell on round even numbers, say 5.10, 5.20, 5.30, 5.40 because that’s what everyone else does, so I’ll sell at 5.08, 5.18, 5.28 etc.

Selling Losers (stocks that are going sideways or down)

When I stock is flat lining or falling, psychology plays a big role in exiting a position. You don’t want to make a weak stock even weaker because you’ll just shoot yourself in the foot. You also don’t want to be too cute about selling it because it’s probably only a matter of time until someone else sells. If I feel I have time, I normally look for a larger bid and sell a percentage of the bid. So if someone is bidding for 10,000 shares, I might hit it for 6,000. This way I won’t make the stock even weaker if I were to take the whole bid. It once took me a couple months to exit a position in this manner, but the stock price wasn’t affected.

On the fringes of extreme volatility is volume. Meaning if a stock is down 15-20% in a day you will find more buyers, then if the stock trickled down 3% per day over five days. If I feel I don’t have much time and there is significant downside, I will just sell the stock down 15% so I can find the volume to just exit a nice percentage of my position.

To be a successful investor you need to know when to sell and how to sell. It’s taken several years for my selling strategy to evolve. For me it’s more of an art than an exact science. Feel free to comment and give me your thoughts on selling.  

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Comments 10

  1. Very interesting Ian,

    Selling a story-changing microcap curtained with illiquidity is definitely challenging. However, that’s a pretty thorough approach that you’ve just posted. I especially like the quote about over-confidence… Kudos to your wife for being such a good selling advisor! lol

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  2. What happens when the price/value discount narrows? Meaning if you bought a stock for $15 that you think is worth $30, then the price goes up…$25…$26…$27…$28 – at what point do you start selling?

    Do you wait until $30 or do you start unloading slightly before that?

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      You constantly gauge the situation because it’s a moving target. With my investing, I’m trying to buy undervalued companies that can get very overvalued. I’m trying to buy them when they are very illiquid and sell them much higher when they are liquid. I’m willing to hold for years as long as management executes and the story doesn’t change.

      My style of investing likely differs from yours but by the time the stock is $30, fair value may have increased to $40 so there isn’t a reason to sell. Or the opposite could happen. It’s a combination of valuation and your gut. I’ve had my fair share of loss so my gut has become a better predictor through the years.

  3. The absolute best time to sell is when you start thinking about selling.

    Like you, once I start selling I can’t stop. “I have 100,000 shares so I’ll cut that back to 75k because I don’t like how these guys are executing” turns into me dumping an entire position (if the liquidity is there) within 2-3 weeks.

  4. From $35m to 0? that’s a tough loss to swallow! when you start singing “all i do is win win…!” , you should sell

  5. This is a very interesting article for me…. and likely one of the more usefully I have read… I agree that buying is easier than selling by multiples of difficulty …

  6. My investing style is exactly like yours so I wish I read some of your advice earlier. Was up 200% this year and lost over half of the gains in two days after getting over-confident and thinking all I could do is win. As the year progressed – I kept getting riskier and riskier – until BOOM – finally was wrong.

    Anyway the reason for my comment is that I find your content 100% relevant even though I don’t focus on only microcaps. I’ll invest in any size company from 10 mil market cap to $50 Billion. And guess what? All of your rules still apply (except maybe for selling into illiquidity cause that’s often there for larger companies).

    You should give yourself more credit and position your excellent advice to be taken into consideration by ALL investors not just microcap. Good job Ian… met you once at an EGMI conference.

    Best

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  7. Hi Ian,

    Nice article. Its great to learn about your approach to selling a stock.

    I agree with you that selling is more complex decision than buying as the factors are more dynamic. In case of buying, I find that most (not all) of the parameters can be handled like a checklist, which might not be the best approach for selling.

    I believe that fall in operating performance (like declining sales, profitability, cash conversion cycle, increasing debt etc), change in business dynamics which might not seem temporary (i.e. the story gone wrong), pricing/profitability regulation by government and rationalizing the portfolio composition are some of the reason which indicate a trigger to thinking about a sell decision.

    Even after presence of above mentioned event, I might not be able to execute the sell decision clinically as I would not want to be an ex owner of a stock which goes on to make millions for its shareholders.

    A few months back I wrote a piece on my thoughts of selling a stock, which can be read here:

    http://www.drvijaymalik.com/2015/05/when-to-sell-stock.html

    Hope it might be useful for other readers of MC2 as well.

    Thanks again for sharing your thoughts!

    regards,
    Vijay

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