In his latest weekly letter, Raymond James’ Jeff Saut begins with an outside quote.
During major sustained advances in stock prices, which usually occupy from five to seven years of each decade, the investor can complacently hold a list of stocks which are currently unpredictable. He doesn’t worry about the top because he knows he is never going to sell at the top. He knows that the chances are overwhelming in favour of the assumption that he will get far better prices by waiting until after the top is passed and a probable reversal in trend can be identified than he will ever get by attempting to anticipate the top, and get out on the nose. In my own experience the largest profits we have ever taken have come from stocks purchased while they were making a new high in a market which was also momentarily expecting the top.
As I have already pointed out the absolute price of a stock is unimportant. It is the direction of the price movement that counts. It is always probable, but never certain, that the direction of the price movement will continue. Soon after it reverses is time enough to sell. You should sell when you wish you had sold sooner, never when you think the top has arrived. That way you will never get the very best price—by hindsight your individual transactions will never look daring. But some of your profits will be large; and your losses should be quite small. That is all that is necessary for a satisfactory, enriching investment performance.”
Stock Profits Without Forecasting – by Edgar S. Genstein
Here’s Saut’s commentary:
These are two of the most important paragraphs I have encountered in 45 years of studying markets. DO NOT read them just once. Go off to a quiet spot that invites contemplation and READ THEM SEVERAL TIMES. Then reflect on all of the mistakes you have made in trading and investing. Bells will ring, and curses will be uttered, if you are truly honest with yourself. My advice is to keep this
quote handy, read it over, and study it every time you get ready to make an important buy or sell decision; especially if your emotions reign.
Obviously, I agree with Mr. Genstein’s advice, but over the years have added a “twist” to his sage strategy. That twist has been to be a scale-up seller in select stocks that have appreciated when I think I should raise some cash. This does not mean I sell the entire position if I continue to find the fundamentals to be favourable. But, scale selling partial positions accomplishes a number of things.
Firstly, it allows capital gains to accrue to the portfolio (sometimes long-term capital gains and sometimes not). Secondly, it rebalances said stock position back towards the original portfolio weighting intended. Thirdly, it tends to give me the “margin of safety” mentioned in Benjamin Graham’s book “The Intelligent Investor.” To wit, this strategy allows me to hold some of my original
investment positions until I “wish I would have sold them sooner.”
I revisit this topic this morning after spending last week in Colorado speaking at several events and seeing institutional accounts. Unsurprisingly, most of the institutions have had a difficult time over the past few months. As one portfolio manager put it, “While we make money in one position we give more than that back in another.” Indeed, since the “buying stampede” ended on January
26th it has been a market in which it has been pretty easy to lose money. For example, at the intraday high of January 26th the D-J Industrial Average (INDU/13029.26) traded at ~12842. Last Friday the senior index closed at ~13029 for a 12-week gain of 0.015%.
Meanwhile, many individual stocks have fared far worse. As for retail investors, my presentations to them last week found most frozen like a deer in the headlights of a car buffeted by the recent decline and the negative “spin” from the media…