Economist Writing Every Day

90 plus per cent of people, they spend all their time on the buy decision and then they figure it out as they go along on when to sell and we say that’s crazy. You need to establish sell criteria, even if it’s just rebalance, even if it’s a trailing stop, whatever it may be on all your public market positions, because otherwise it gets emotional and that creates huge problems.

Meb Faber

Last week I explained why I buy individual stocks. This week I’ll share how I think about when to sell individual stocks, as I go through my portfolio and decide what to hold and what to sell. This is the first time I’m doing this exercise, though I should have done it long ago; until now I’ve unfortunately been on the wrong side of the above Meb Faber quote.

I actually think that most people are correct not to put much thought into what to sell, because I still agree with Buffett and most economists that most people should just buy and hold diversified index funds. Thinking about selling too much might lead people to sell everything whenever they get worried, sit in cash, and miss out on years of gains. But the important truth in Faber’s point is that if you are buying stocks or active funds for any reason other than “its a great company/idea that I’d like to hold indefinitely”, it makes sense to put as much thought into when/whether to sell as when/whether to buy.

People buy stocks all the time based on short-term arguments like “this banking crisis is overblown”, or “I think the Fed is about to cut rates”, or “this IPO is going to pop”, or “I think the company will beat earnings expectations this quarter”. These might be good or bad arguments to buy but they are all arguments about why it makes sense to hold a certain stock for weeks or months, not for years or indefinitely.

But people often buy a stock for short-term reasons like these, then hold on to it long term- either out of inertia, or because they grow attached to it, or because it lost money and they want to hold until it “makes it back” (sunk cost fallacy). None of these reasons really make sense; they might work out because buying and holding often does, but at that point you might as well be in index funds. If you’re going to be actively trading based on ideas, it makes sense to sell once you know whether your idea worked or not (e.g., did the company you thought would beat earnings actually do it) to free up capital for the next idea (unless you genuinely have a good new idea about the same stock, or you think it makes sense to hold onto it a full year to hit long-term capital gains tax). Its also always fair to fight status quo bias and ask “would I buy this today if I didn’t already own it?” (especially if its in a non-taxable account).

Maybe this is obvious to you all, and writing it out it sounds obvious to me, but until now I haven’t actually done this. For instance, I bought Coinbase stock at their IPO because I thought it would trade up given the then-ongoing crypto / meme stock mania. I was correct in that the $250 IPO started trading over $300 immediately; but then I just held on for years while it fell, fell, fell to below $100. The key difference I’m trying to get at here is the one between ideas and execution: its not that I thought Coinbase had such good fundamentals that it was a good long term buy at $250 and my idea was wrong; instead I had a correct short-term idea of what would happen after the IPO, but incorrectly executed it as if it were a long-term idea (mostly through inertia, not paying attention, and not putting in an immediate limit sell order at a target price after buying).

So if you buy stocks for short- or medium-term reasons, it makes sense to periodically think about which to sell. I’ll show how I I think about this by going through some examples from my own current portfolio below (after the jump because I think the general point above is much more important that my thinking on any specific stock, which by the way is definitely not investment advice):

Gas stocks (RRC, EQT, EOG, MGY, PXD, LNG, GLNG, TELL): Tempted to take the win since I bought these in early 2022 (before the Russian invasion) and now they’re way up and the immediate supply crunches seem to be over. On the other hand, they still have PEs in the 5-8 range, which is great these days. I think gas will be more of a complement to renewables than a substitute for a long time, and I’m happy to be betting against those who think otherwise. Conclusion: Partial sell, be ready to buy the dip

Steel (CMC, X): Still cheap, I think the trend toward building infrastructure will continue a while, at some point people will get confused and buy X thinking its Twitter. Conclusion: Hold, consider adding

Homebuilders (HOV, PHM, DHI, LEN, KBH): Really want to take profits because they are up so much since I bought this January and many have hit all time highs. But this is all so clearly justified by their earnings; PEs are still around 5. High interest rates have proved oddly beneficial for them and I think this is likely to persist. Conclusion: Hold, consider adding

Shippers (GSL, TRTN, TGH, USEA): Shipping crunch is over, some of these still look cheap but some are priced about right. Conclusion: Partial sell

Berkshire (BRK.B): Stock is near all time highs but earnings have been bad for a year; TTM PE is actually 100. Conclusion: Sell (maybe keep 1 share to attend the annual meeting)

Agriculture (ADECOAGRO): PE of 17 is expensive for an ag company. Conclusion: Sell

Citibank (C): PE of 7, trading at half of book value. Still seems oddly cheap for a major brand I don’t expect to go bankrupt. Conclusion: Hold

Jackson Financial (JXN): Still ridiculously cheap. PE of 1.5, price to book 0.3; how is this happening in a stable industry and a company that shows no signs of going bankrupt? What am I missing? Conclusion: Buy more

Intel (INTC): Bought in 2021 hoping the new CEO would revive things; held through 2022 hoping the CHIPS act would boost them; held through 2023 hoping to catch the AI wave. Nothing has worked, the stock is way down and the company is losing money trying to catch up to the new tech leaders. Conclusion: Should probably sell but they can’t possibly continue to fail this hard… can they?

Novavax (NVAX): They made a great product but never figured out how to scale it well or ship on time. Now they’re losing lots of money. This is now a bet that their tech can be applied to new vaccines they can ship at scale. This is probably unlikely, and I should probably unload it anyway since its good for health economists to be able to honestly say “I own no individual health care stocks”. Conclusion: Should sell, but they made a great vaccine that protected me well

Coinbase (COIN): Told the initial story above. Their product is good but its a money-losing company that keeps diluting shareholders and is somehow trading up after being sued by the SEC. Conclusion: Sell

Great Ajax (AJX): Why do I own a single-family home REIT when my own home is my largest asset and I should be diversifying away from housing? How are they managing to lose money when home prices and rents are so high? Conclusion: Sell

Redfin (RDFN): 21 years old and still losing money. Why did I ever own this? Conclusion: Sell

Noticing a pattern: I’ve done best when I thought an industry would do well and so bought a bunch of companies in it; I’ve mostly done poorly picking individual companies (most notably with Intel, I probably picked the only semiconductor company that is down over that time period). This may just be a coincidence in a small sample, but it also makes sense that economists would excel at identifying industry- or macro-level trends while being relatively bad at picking companies within an industry compared to people who are good judges of management skill or who enjoy poring over balance sheets.

What am I buying with all the cash I just freed up? Stay tuned…