There have been plenty of advice on when to buy stocks, deciding what stocks to buy. One can look at fundamentals, business of the company, momentum, insights, fair value with plenty margin of safety and so on. However, not much has been said on when to sell. One that’s probably most remembered is the following:
“Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling” – Peter Lynch
This thought come to mind when I was moving into my new rental apartment. The worst part of renting is that you may not fit your old furniture in the new place, hence the need of selling and buying.
In this occasion, I am a buyer. I needed to furnish my new apartment, I know I will be moving out in a few years, so I don’t want to buy new or fancy furniture that won’t fit my next place.
I browsed on second-hand items marketplace for furniture in great condition that are >50% off retail, sometimes delivered to your door steps, assembled. Yes, I am a big fan of IKEA furniture, but I’m not a fan of having to assemble them myself, or paying >20% of the furniture price for professional assembly service.
While hunting for these furniture, it struck me:
- Sellers are most responsive when the item is recently posted, and that the seller indicates that he/she needs to sell it by certain date
- Sellers are most willing to negotiate the price down when the seller is obligated to sell (He/she moving out of the country or moving out of a place in very short time, so these items are must sell)
Note the word, obligated – or to certain extent, must sell due to the constraint that are in place. In most cases, this is due to rental expiring or having to move out of town. Sellers of these kinds have very high intention of selling, and willing to bring the price down to ridiculous levels (sometimes >90% off the retail)
I put some thoughts about this experience and realized that, while there are plenty of debate about when to sell a stock, one can look at the inverse and it becomes more deterministic, i.e, how to NOT have to sell a stock:
- You don’t want to put yourself in a situation that you MUST sell (margin calls, having needed emergency money, having to meet redemption)
- You don’t want to put yourself in a situation that makes you have high intention of selling – which is going to make you very responsive to Mr. Market
- You don’t want to buy speculative issues that at some point, you need to sell as it doesn’t really fit your portfolio
- You don’t want to buy issues that you are not comfortable holding for a long time (i.e, you feel itchy to sell)
This rhymes with one of the book I read, which says statistically, it is better to buy all in one go, and sell piece by piece. In other words, DCA when selling, not when buying. By definition, the situations I described above prohibits you from DCA-ing when selling.
Obviously, it is easier said than done, or one may say that this is very obvious. I found myself a good hunter for bargain, but not necessarily smart about putting myself in a position not to have sell a stock.