Stock for sale

Selling...

Sell; a bad word, one I'd prefer to avoid uttering. No one wants to talk about selling stock. The few, the brave, tackle it now and again. 

Why is it a bad word?  Well, if you sell you may realize gains, or not. If so, it may be a tax generating move. If you sell at a loss, you've lost. Bad choice, unforeseen circumstance, incomplete data set; something, but still a loss and the regret of not foreseeing what was coming.If you sell because you need cash, you reduce the size of your engine.  If you sell to rebalance, you're probably cashing in a winner, rotating from your faster horse to a slower one.  If you sell an "overvalued" stock, you are obligated to have an idea in mind for where you'll invest that cash. We all know cash is slowly losing against inflation.

So, I'm not predisposed to sell stock.  The Oracle himself said that his ideal holding period is forever.
Some very smart older investors in the pages I read say sell never, or rarely.  I like that advice, because it relieves me of the concern that there will be many of the circumstances that warrant serious consideration of selling shares. It also tells me that the one of the key factors in avoiding the need to sell a stock is the nature of the decision to buy in the first place.

Investors have different names for their foundational holdings. Core stocks, "forever stocks", high conviction stocks, widows and orphans stocks are all names applied to the ones you intend to buy and never sell.   Food never goes out of style and never is made obsolete by advances in technology.  Toilet paper and toothpaste appear to have the same qualities. Electricity, water, telecommunications are similar in eternal necessity and appeal. In the last century, this one and perhaps the next, petroleum products seem to be similarly necessary, although supply, demand and prices can be pretty volatile. Buildings to house ourselves and our businesses appear to be a very stable place to invest, in general.
With a bit of attention to detail, purchase of such companies comes down purely to a "at what price" decision. The proverbial "margin of safety" fairly quickly gives one room to tolerate a significant downdraft and still have an asset the performs well over the long haul, and throws off cash on which you can live.  Once purchased, you can basically forget about them, reinvest dividends until you need them, and rest assured that they will be there far longer than you will, continuing to generate income.

Many investors have another class of stocks that are not core, but are still considered to be long term holds for capital appreciation, income or both. Technology stocks are often thrown into this category. One doesn't know if they will be around 30 years from now or in what form, but in the intermediate term future they appear to be vital to our economy and are pumping out lots of cash. Many cyclical industrial stocks fit into this category.  Again, the purchase decision is the key decision, and selling is either based on a target amount of appreciation, the end of a business cycle or some kind of horrible disruption that couldn't be anticipated.

Finally, there are the speculative investments. No earnings, no income, lots of potential growth, but who knows if they will be the winner or a competitor will leave them in the dust. Here's the problem; they are by nature volatile, the story may take many years to play out, and one may see paper losses long before being ready to take gains.  I've learned that this kind of investing just gives me too much heartburn and it's not for me.  So rather than worry when to sell, I just won't buy in the first place.

So what about those other "sell rules"?   What about flattening of the earnings curve? What about declining rate of dividend growth, freeze or cut?  What about "fundamental changes in the business"?
I don't have adequate experience in exercising these sell rules, so the best I can say is that I'll look at each of these on a case to case basis, hope that I hear the rumors before the facts occur on the ground and hope I don't show up too late to the "sell" party, when the losses have already been severe.

Since the reasons for "crisis selling" are infrequent and I am holding somewhere around 50 ownership positions, I can withstand a 50% loss in one position with a mere 1% effect on the overall portfolio value; roughly the dividend payout of a single quarter for my portfolio.  That is the value of diversification. 

One thing I'm learning about stocks that lose a lot of value;  the reason they lost the value is generally the same reason they aren't likely to roar back to even, unless they are a victim of a smear campaign or some market irrationality. If the reasons are internal to the management, sales or earnings, then one is best choosing another horse to ride back to the barn.  That's where the cold, emotion-free, attachment-free, no-pride attitude comes in. No basketball player I know shoots 100%.
After a missed shot, they come back and shoot again.  In investing, the missed shot has to be completed by a "sell".  Otherwise, that piece of the game just comes to a halt. I am amazed at how quickly the "hurt" in a loss goes away after you turn it into cash. When it hurts most is while you are holding that depreciated asset, hoping things will magically turn around and roar back like your original thesis foretold.

I've begun to pay more attention to what the most mature voices I read call "quality" in companies. Some use credit ratings on debt as a metric for quality. They also depend on the duration of the dividend and earnings history, payout ratio and other indications of safety of the dividend. Given that dividend freezes, cuts and suspensions all are value killers,  it makes sense to focus on dividend coverage for those companies that make a point of paying significant dividends. Since those are the companies I like to buy, I'm going to start paying more attention to how one distinguishes quality in the earnings/dividends and debt rating. Then that ugly "sell" word won't need uttering very often.