Deciding when to sell
DEN SOMERA
After I wrote the article about the different mechanical methods used to sell (or buy) stocks, I received many more questions that actually meant one thing: “How or when do you exactly sell?”
Again, I believe this question is best answered by describing the circumstances under which it has to happen: In stock investing and trading, capital preservation and profit-taking are the only two circumstances under which you need to sell.
Based on market practices observed, there is a certain methodology that is applied to protect capital and there is another one used in profit-taking.
Liquidity or the need for cash is another situation that can trigger the need to sell. However, this is not considered part of the dynamics that play into the issue of when to sell in stock investing and trading because it occurs under an entirely different dimension that disregards the need for timing or appropriateness of the method used.
Progress of the contest
Before we go on further, let us first look at the progress of the contest in Week 14, covering June 4 – 8, 2018: (See Table 1)
Play Hard has taken the number one spot in the leaderboard, notwithstanding his failed effort to take profit last Friday from some of his holdings in Ayala Land, Inc. (ALI), SM Prime Holdings, Inc. (SMPH), EEI Corporation (EEI) and Metropolitan Bank & Trust Company (MBT). His selling prices were just too high.
It was the sheer quality of his stock selection, however, that again propped up his performance standing. His stock holdings remained relatively unaffected by the negative impact of the market’s general weakness. (See
Table 2)
Due to the primacy of his one and only small holding in Manila Electric Company (MER), HRB2015 was able to take the second spot, just a step behind the frontrunner of the contest.
His strategy of leaving much of his capital in cash is effectively working under the market’s present weak condition. But the relevance of this strategy may soon fade away as the market recover its bearings, considering the many developing positive leads that are expected to unfold in the next two to three weeks and may just radically reverse the generally negative outlook and direction of the market. (See Table 3)
The three stockholdings of Dondee Prime actually defied the market’s downturn last Friday, which also enabled him to stay in third place. However, he has not really done a lot, much less drew growth from the price actions of his present stockholdings even by only “rebalancing” the distribution of his investments in each of them. (See Table 4)
Small Time Trader made some partial profit-taking the other week in his holdings in SM Prime Holdings, Inc. (SMPH) positions and Robinsons Land Corporation (RLC).
He used most of the sales proceeds to speculate on the ongoing price plays in listed and oil-producing companies such as Oriental Petroleum & Minerals Corporation (OPM), brought about by the surge in the prices of crude in the world market. He subsequently took profit on the shares on June 6, and remained silent, again, since then.
Small Time Trader has a good stock selection and still has some good amount of cash to invest. Yet, like most of the players in the contest, he needed to make more “rebalancing” to grow his investment returns. (See Table 5)
St. Michael is another player who has not actually touched his original stock positions. His cash balance is also no longer that big enough to counter the negative impact of falling prices that is eroding the values of his stockholdings.
He may have in mind a balance of speculative and solid stocks in his portfolio, but the way he structured his investments into a two-stock portfolio, this may not prove effective in drawing more investment returns. (See Table 6)
Disaster suddenly hit Pixiu last week, although this is the second time it happened. She got stuck with a stock with unreliable trading volume. Her performance standing was pulled down low to 91.90 percent by her position in Imperial Resources, Inc. (IMP). Trading unexpectedly dried up to zero in IMP when she tried to sell it last Friday.
Following the rules of the virtual stock trading challenge, any stock that can’t be sold is as good as lost. This now demands an immediate review of her present stock selection criteria. (See Table 7)
Bottom line
What drove down Dud67 in his performance and position in the leaderboard was his failure to observe the basic rules in “How or when to exactly sell?”
To preserve capital, the basic rule is not to allow a loss of more than 20 percent. You only need to make 25 percent to earn back the loss. Beyond it, even by another 5 percentage points, like 25 percent, you already need to make not less than 37.0 percent to gain back the loss. As is have said, “losses grow arithmetically, and the profits required to recoup increase geometrically.”
In taking profits, one mechanical rule that is recommended is to “get a third of the profit of what you are making and another third when the profit doubles some more, then take the rest of the profits when you see a pattern to the reverse.”
A protective stop is further recommended to prevent unwanted lost opportunities, in the event that the price of your stock slips from its advance. Under current market conditions, a rate of 5 to 8 percent stop is recommended in order not to prevent being an unwilling victim of a price whiplash.
Den Somera is a licensed stockbroker. The article has been prepared for general circulation for the reading public and must not be construed as an offer, or solicitation of an offer to buy or sell any securities or financial instruments whether referred to herein or otherwise. Moreover, the public should be aware that the writer or any investing parties mentioned in the column may have a conflict of interest that could affect the objectivity of their reported or mentioned investment activity. E-mail address of the writer is den.somera@manilatimes.net
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