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Email this10:00 pm
April 6, 2013
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The S&P 500 index is not made up of a random, non-curated selection of 500 stocks. To some, such an index is managed.
Globe & Mail writer Scott Barlow wrote the following insight a few weeks ago in The three biggest investing trends of the 2020s…:
One of the biggest investing epiphanies I’ve ever had came from famed Legg Mason fund manager Bill Miller. Early in his career, after a period of underperformance, Mr. Miller realized that indexes like the S&P 500 weren’t passive, but actively managed. He then attempted to discover why the criteria underlying the selection of companies for equity benchmarks led to better performance than fund managers.
Mr. Miller observed that a degree of index outperformance resulted from a lack of tinkering with winning stocks. Once a company was added to the index, it was left alone – no trimming for valuation purposes or because it grew to a large percentage of market capitalization.
…
10:24 am
September 11, 2013
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So does this mean regularly buying and accumulating (not selling) big 5 bank stocks over the last 30 years or so was a good idea? That's what I got out of it.
12:16 pm
April 6, 2013
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Buying and accumulating the stock of successful and reasonably valued businesses is always a good idea.
The important points of the insight are (1) the performance of the portfolio is more important than the performance of individual stocks and (2) don't be too trigger happy on selling winners.
That saying about "can't go broke taking profits" is actually quite stupid. Brokers love it because it generates commissions on the sale and then when the happy client reinvests elsewhere.
But, if one keeps selling every time a stock goes up by 10%, then one will end up with a portfolio of deadwood and duds in the long term. One can then go broke because the clipped gains from the winners won't make up for the losses from the duds.
6:37 pm
October 21, 2013
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That assumes your new investments are duds. Some people just wait for the next dip and reinvest in whatever they previously succeeded with. They have buy and sell orders programmed in. There are risks in that, but it's not a loser.
Selling for a profit is not necessarily a "stupid" idea. Some sell so they can actually use their money. They want to spend it. It may be stupid to sell and buy something worse, but, unless your sole goal is to enrich your heirs, it's also stupid to never get any benefit at all from your profits because you were afraid to sell.
It IS true, by definition, that you can't go broke taking profits. But you CAN go broke making unrewarding investments. One does not always presume the other.
7:07 pm
April 6, 2013
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Not true. There will be duds and losers even after years. Not every loser recovers. Nortel isn't coming back. Does anyone with the remnants of Yellow Pages think it will go up to by 200X in their lifetime and recover their original investment?
You are confusing selling because one needs the money from selling just because something has gone up by 10%.
The winners need to be able cover the losses from the losers. So, yes, one can go broke taking profits. Keep the eyes on the portfolio and not on the individual stocks.
If one needs needs to withdraw money after ten years or so, one should consider selling the losers before one starts selling some of the winners. That way, over time, one ends up with a portfolio that is tilted towards actual winners instead of towards actual losers and duds.
There is actually no evidence that anyone succeeds in that sell-and-buy-back-on-next-dip approach. Because if it is a winner, it eventually won't dip enough to trigger the buy order. In contrast, the losers will definitely dip enough to trigger the buy order.
If that actually did work, then there would be a few people who are worth about the same as Warren Buffet now who got just as wealthy trading like that, instead of investing for the long term.
9:10 pm
December 29, 2018
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I’m doing very well on the stock market and I don’t sell much. My portfolio is 100% distribution driven and if a position reduces its yield significantly, I sell and reinvest to a new position or add to what I already have. Occasionally, I re-equilibrate (reduce a position to add too another) but that the extent of my dealings. I prune and I tweak and I like it!
1:28 am
October 21, 2013
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Norman1 said
Not true. There will be duds and losers even after years. Not every loser recovers. Nortel isn't coming back. Does anyone with the remnants of Yellow Pages think it will go up to by 200X in their lifetime and recover their original investment?You are confusing selling because one needs the money from selling just because something has gone up by 10%.
The winners need to be able cover the losses from the losers. So, yes, one can go broke taking profits. Keep the eyes on the portfolio and not on the individual stocks.
If one needs needs to withdraw money after ten years or so, one should consider selling the losers before one starts selling some of the winners. That way, over time, one ends up with a portfolio that is tilted towards actual winners instead of towards actual losers and duds.
There is actually no evidence that anyone succeeds in that sell-and-buy-back-on-next-dip approach. Because if it is a winner, it eventually won't dip enough to trigger the buy order. In contrast, the losers will definitely dip enough to trigger the buy order.
If that actually did work, then there would be a few people who are worth about the same as Warren Buffet now who got just as wealthy trading like that, instead of investing for the long term.
I'm not sure what is going on here but you are not really addressing what I have said. You are fighting a different fight, which doesn't involve me.
I have said what I wanted to say. Those who are interested in it will read it carefully. No point in my trying to say it a different way.
6:17 am
March 30, 2017
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my 2 cents:
all the strategies mentioned have their merits, as they suit different portfolios at different times:
Buy and accumulate winners, sell losers and not look back:
Some were perceived to take over the world and be perpetual winners but ultimately a dud, IBM, Nortel came to mind. Some were expected to fail but did really well after all, look at Apple in the 2000s or more recently AMD.
Sell and take profit, looking to buy back later:
There is nothing wrong with taking profit, its never wrong taking profit.
Warren Buffet:
His midas touch is not that magic last few years. Most of his high profile purchase so far has been duds. TEVA, KHD, WFC, Airlines. Even his purchase of ABX is under water....
7:03 am
September 11, 2013
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Sell and buy back later does not work, it's only in retrospect that you can know the times to have done either. What really happens is you sell your winner, it continues to go up another 5 bucks, then you buy back when it drops a buck or two (it never goes back down the 5 bucks), plus you miss a dividend payment or two, way better off if you'd kept it in the first place.
4:37 pm
October 21, 2013
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There are a lot of ideas expressed in this thread which, in my view, don't hold water or are only applicable in limited circumstances.
if anyone is seriously interested in hearing why I say that, they can ask. If I have time and believe the questions are legit, I will respond. I doubt anyone is that interested.
5:34 pm
April 6, 2013
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Sure, Loonie. Maybe I didn't quite understand what you said.
You wrote that one could not go broke by taking profits. I said that actually is not the case. It seems strange. Going broke by realizing gains?
That can happen because when one sells to take profits, the portfolio has given up the future profits of that particular investment. Unfortunately, one hasn't sold any of the duds.
Sell winners, keep the duds and deadwood. Eventually, the portfolio will be loaded with duds and deadwood because not all replacements for the winners sold would be winners. As savemoresaveoften pointed out, not even an investor like Warren Buffet can avoid duds.
The investor will wonder what happened. Had many winners over the years and took actual profits. How come the portfolio is underwater or underperforming then?
It is a very strange thing. What seems beneficial on an individual investment basis (taking profits of the winners) turns out to be bad for the portfolio in the long term.
6:28 pm
September 11, 2013
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Unbeknownst to you stock A is a winner, B is a loser, you buy $100 of each. Stock A goes up 20% so you sell it for $120. You buy $120 more of Stock B, which has dropped to $80, so you now own $200 worth of B. It would have to continue down to zero for you to go broke, could happen I suppose.
10:54 am
April 6, 2013
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Breaking even after taking a risk on two stocks is not a good outcome. One needs to have some compensation for the risk taken. Otherwise, one will eventually have an attempt that fails to break even and result in a net loss.
Two stocks is not really a portfolio. The long term issue is clearer with a portfolio of 20 to 30 stocks.
If one is good, one will have an 80%/20% split of winners/losers. After the winners go up by 20%, you'll replace the 80% with new stocks where 20% of that 80% will eventually be losers. The split becomes
- 0.8 x 80% = 64% winners and
- 20% + 0.2 x 80% = 36% losers.
Over time, the number of losers will become significant.
It could still work out okay if the value of the winners ends up being much higher than the value of the losers. But, that will be challenging to do when one has capped the gain from each winner at 20% but each loser can still lose 100%.
Please write your comments in the forum.