Sell Rules
This is slightly different from my usual style of posts, but I wanted to share some thoughts on selling. I have included some rules of thumb regarding when to trim and when to exit a position completely. Note, this is not meant to be an exhaustive list, simply an initial guide that I plan to expand over time.
On the other hand buying is often simpler and I would recommend reading my post “How I Research a Stock” below:
Reasons to sell (Exit all)
Thesis has changed or broken
Lost trust in management
To reallocate capital to higher-conviction opportunities
Lost interest in following the company
Extreme overvaluation and it is hard to envisage positive returns for several years
If a company is being acquired, rather than waiting for the merger to close, one can exit and redeploy capital elsewhere
Tax-Loss Harvest
If it is a trade:
your stop loss is hit.
Sell before earnings if the implied move exceeds your profit cushion. Likewise, if you are already carrying a loss, exit to prevent that loss from compounding.
Reasons to trim
If a position is getting overweight in the portfolio then can be worthwhile to reduce it’s size.
If a stock is getting very extended:
For mid or large-caps, I consider a price >70% above the 200-day SMA to be significantly extended. In contrast, small caps can often sustain extensions greater than 100%. As always, context is critical because a strong catalyst can fuel continued upside.
Conversely, you can manage risk in an extended position by trailing your stops. One method is to reduce exposure upon a close below the 10-day EMA and liquidate the remaining position if the stock closes below the 20-day EMA.
If a stock is in an uptrend but breaks a key MA (eg 50SMA) for the first time then consider selling 1/4-1/3 of position as has there has been a change in character.
If stock responds badly to good news such as a good earnings report, then it could be best to reduce the position size. This may seem counter intuitive but selling off on good news is something I have found to be a good sell indicator.
If it is a trade, sell 20-25% when the stock moves 20% or so from entry and then move stop-loss to breakeven, at a minimum.
If a stock runs or gaps-up on no news, then the chance of mean reversion is quite high. This can be a good time to reduce exposure.
If a position is dominating your thoughts then it is a good idea to reduce the size of the position or exit completely. Not only does this reduce your risk but frees up mental capital.
A useful tip when trimming is to sell the highest cost-basis lots first. This serves two functions: it lowers your average cost on the remaining shares, and in a taxable account, it reduces your immediate tax liability.
This is especially useful if you plan to hold your core position for a long period because by saving the lower-cost shares for later, when you come to sell they would potentially qualify for long-term capital gains tax rates.
Thank you for reading, ensure to subscribe to the plan that suits and see you for the next one!
Thank you!
Very good post, buddy!