Selling bad performers and immediate reinvestment in good

[Dicky99]

Hi all,

So now I'm almost 5 years into this private investment game. So far, we have accumulated a fairly reasonable "second pension" and I'm personally hoping to be able to continue this effort for the next 5-10 years.

I've had some pretty good advice from many here over this past 5 years, and I wondered what you folks reckon to a strategy of mine which I partake of periodically.

Suppose I have a few "under-performers" or even just stocks whose fundamentals have been adversely affected by unforeseen events since the time that I first added them. A recent example being my Adidas shares which seemed fairly reasonable pre-covid, and then struggled to reassert themselves post-covid particularly with China's zero policy. They were then hit again by their silly decision to enter a partnership with Kanye West, and the ensuing fallout once the full extent of his anti-semitism (and general lunacy) came to light. The result being the termination of the partnership, a big loss in brand appeal and potentially a large amount of low value inventory to dump.

My policy with these under-performers is to dump them at points in time where the markets "seem" to be about to turn more negative, that is sell the baddies and at more or less the same time use the regained cash (admittedly after taking a 30-40% loss on the liquidation) to purchase (what I believe are) better shares - or least ones for which I have a better sentiment at the time. My view is that whilst both the bad share and good shares may well bounce back once the market turns good again, the ones with the stronger fundamentals will almost certainly pull back harder, and hence act as a proxy vehicle in recovering some of the loss encountered over the duration of holding out on the lemon share.

I'm wondering if anyone here pursues similar behaviour. It sounds like a no-brainer to me. My opinion is that this a slightly better way of "re-balancing" as opposed to mechanically re-balancing every N months based on an arbitrary "rule" found in an investment article. Perhaps I'm just fooling myself into a way of making myself feel better about the process of cutting losses. But having said that, if it works then do it, and for what it's worth a share with better fundamentals seems much more likely to make a stronger recovery, provided its business advantages remain.

thanks Matt

It seems that you are in good company with Warren Buffet. Very topical because this is what he said in his annual letter published in the last couple of days...

Most investors don’t know which of their investments will be their most successful. Berkshire’s portfolio has concentrated itself over time. In the process, the winners become bigger, while the losers become insignificant. As he put it: “the weeds wither away in significance as the flowers bloom”.
Great long term returns are often the result of letting winning investments run, rather than trying to reallocate profits to the laggers. Indexes like the S&P 500 have also benefited from this self-concentration.

[simoan]

I'm thinking more and more that I'm a walking contradiction. As possibly others here are.

It's difficult to have these two points of view/behaviours at the similar points in one's investing life:

1. I accept that I can't beat the market
2. I'd like to be a successful investor and I stock-pick

Point 1. seems to contradict point 2. The only reason for stock picking (and acceptance of the overall market making superior returns) would appear to be the construction of an annuity alternative, i.e. a HYP. But presumably if one starts early enough a World Equity Index fund paying distributions would be seem a reasonable substitute.

Matt

You just need to be more fund manager and choose a different market!

I am about equal to an all world tracker over the lsat few years but ahead of any UK index.

That's incredible. When I unitise our portfolios each month I make a note of the value of Total return of FTSE100 (https://uk.investing.com/indices/ftse-1 ... rical-data) and of a few other indexes.

My notes reflect that the FTSE100 TR (https://uk.investing.com/indices/ftse-1 ... rical-data) has risen 9.18% between 26/2/22 and 25/2/23. So if your unit price has out performed the footsie 100 over that same interval then I think that you've done pretty well.

By comparision the SP500 TR (https://ycharts.com/indices/%5ESPXTR) has fallen by 7.9%. My unit price fell by 1.3%.

Matt

Matt,

I really don't see the point of comparing your portfolio performance with "the market", particularly if it's a capitalisation weighted index like the main FTSE indices. Apart from anything else, you don't need to accept "market risk" i.e. you don't need to be 100% invested in equities all the time; cash and other types of investments are available. As for beating the FTSE 100... last year was an outlier and just because you didn't beat it 1 year out of the last 10 is nothing to beat yourself up about. What you should really concentrate on is meeting your investment goals whilst taking on the minimum amount of risk.

All the best, Si

[TheMotorcycleBoy]

I'm thinking more and more that I'm a walking contradiction. As possibly others here are.

It's difficult to have these two points of view/behaviours at the similar points in one's investing life:

1. I accept that I can't beat the market
2. I'd like to be a successful investor and I stock-pick

Point 1. seems to contradict point 2. The only reason for stock picking (and acceptance of the overall market making superior returns) would appear to be the construction of an annuity alternative, i.e. a HYP. But presumably if one starts early enough a World Equity Index fund paying distributions would be seem a reasonable substitute.

Matt

You may have seen my updates on changes in my portfolio which appear in the HYP Practical board. viewtopic.php?p=341678#p341678

My strategy is based on periodic rebalancing based on deviation from the median portfolio holding value. I set an upper limit of 1.5% of that median and reinvest accumulated cash based on rankings of holding yield and inverse weight. I also consider selling holdings completely if the yield on such a holding falls below about half the yield on the FT100 but this depends on my feelings about the share. Most recently I disposed of Marston's and Compass, principally to fund roof repairs.

You might find an approach like this useful. My objective is to maximize dividend income. Yours may be different. I use ordinary shares, you use accumulation units. The principal difference is that your dividends get reinvested in their source. Mine get reinvested according to my formula but moderated by weightings of income and weight levels. Just think about it.

TJH

Hi TJH,

I don't execute my portfolio quite like your's (yet?), as I'm still building. As I believe you may have noted, or I've pointed out, some of my holdings are weighted more heavily than others. Typically this is based whether or not they are new holdings/ideas or older ones that I've built up. I also have a notion of how much risk I associate per stock etc.

However, after earlier conversations with you I do now report the "median" value (i.e. the weight) and the multiple of the median attributed to each holding. Indeed my largest holding currently (CRDA) has a weighting of 2x median, and 3.5% of the current market value of the entire foli. That's not deliberate - but having said that my outlook is such that I'd rather have such a holding size be roughly the maximum within the portfolio - in order to minimise company specific risk. (So thanks for making me more aware of the median concept).

I guess I have somewhere between 5 - 10 years of working life left, though I may revisit this if redundancy happens. At some point I should think then about some kind of annuity substitute accompanied with a gradual move to an income based system.

I think that your recent disposals of Marstons and Compass both make sense, without looking at the yields. With the tenacity of the WFH trend I believe that Compass's business will struggle, and I guess Marston's issues relate to pub closures and changes in drinking/eating-out habits.

thanks for sharing your words,
Matt

[TheMotorcycleBoy]

I'm thinking more and more that I'm a walking contradiction. As possibly others here are.

It's difficult to have these two points of view/behaviours at the similar points in one's investing life:

1. I accept that I can't beat the market
2. I'd like to be a successful investor and I stock-pick

Point 1. seems to contradict point 2. The only reason for stock picking (and acceptance of the overall market making superior returns) would appear to be the construction of an annuity alternative, i.e. a HYP. But presumably if one starts early enough a World Equity Index fund paying distributions would be seem a reasonable substitute.

Matt

You just need to be more fund manager and choose a different market!

I am about equal to an all world tracker over the lsat few years but ahead of any UK index.

That's incredible. When I unitise our portfolios each month I make a note of the value of Total return of FTSE100 (https://uk.investing.com/indices/ftse-1 ... rical-data) and of a few other indexes.

My notes reflect that the FTSE100 TR (https://uk.investing.com/indices/ftse-1 ... rical-data) has risen 9.18% between 26/2/22 and 25/2/23. So if your unit price has out performed the footsie 100 over that same interval then I think that you've done pretty well.

By comparision the SP500 TR (https://ycharts.com/indices/%5ESPXTR) has fallen by 7.9%. My unit price fell by 1.3%.

Matt

Matt,

I really don't see the point of comparing your portfolio performance with "the market", particularly if it's a capitalisation weighted index like the main FTSE indices. Apart from anything else, you don't need to accept "market risk" i.e. you don't need to be 100% invested in equities all the time; cash and other types of investments are available. ...

Hi mate,

To be honest like I said above as I unitise each month, it's no aggro to also grab some current TR values of certain indexes and lob em in the spreadsheet. I guess I just find it of interest. My sheets are generated mainly with computer scripts (being a computer programmer) so now that I've got a system it's really easy to do. However I do find Fischer Black's words on portfolio construction and his words on the market (see my post viewtopic.php?p=571821#p571821) pretty interesting too!

Don't worry I'm certainly not 100% in equities. I've a reasonable cash holding now 1) the savings rates (2.9-4.2% depending on product conditions) ain't bad, and more 2) importantly I have keep a sizeable buffer for my kids. One's in her 3rd year Uni, and she'll be (hopefully) living almost independently after June, but I've promised to subsidise her for the first couple of years. The other one (almost 18) is very tricky, had bad time in the lockdown TLDR, and again I need to keep all options open.

As for beating the FTSE 100... last year was an outlier and just because you didn't beat it 1 year out of the last 10 is nothing to beat yourself up about. What you should really concentrate on is meeting your investment goals whilst taking on the minimum amount of risk.

Yeah, don't worry, it's more out of interest. FWIW my investment goals are a moveable feast, basically accrue as much wealth as possible till I stop work!!

thanks Matt

[GoSeigen]

I'm also fortunate to have been long FTSE short S&P the past couple of years. It's long been my view (since 2016 at least) that we'd have a stockpicker's market for some time. This has been borne out by events I think, to some extent, with the S&P being stuffed with the overpriced FANG trash, while the FTSE has pockets of incredible value, like the banks and before that, miners.

The corollary is that index investors are likely to underperform (i.e. they will buy trash at high prices and sell good stuff at low prices, in both cases trading with smart-money active investors), indeed indexes, particularly the FTSE and many european/emerging markets have been trading sideways for a long time, while within the indexes there were very good returns to be made.


The result of this approach is that our portfolios show a raw 45% growth over their pre-COVID-crash high, and that's AFTER taking income of some 10% of initial value over the same period AND being short the S&P (which is up around 25%).

Re: the thread subject, I find it hard to sell bad performers but I've learned not to add to poor positions or to do so only under very strict conditions. Similarly I find it hard to add to add to winning positions except in the early days and far easier to top-slice winners and reinvest in something I believe has value. I couldn't say whether I'm short-changing myself but it suits my psychology and has not been disastrous.

GS

[Bubblesofearth]

I'm also fortunate to have been long FTSE short S&P the past couple of years. It's long been my view (since 2016 at least) that we'd have a stockpicker's market for some time. This has been borne out by events I think, to some extent, with the S&P being stuffed with the overpriced FANG trash, while the FTSE has pockets of incredible value, like the banks and before that, miners.

GS

I'm finding myself increasingly in agreement with you re banks and considering upping my stake in them.

Any feel for which banks might do best from here? I tend to concentrate on UK listed ones, BARC, LLOY, HSBA for example. But that could be short-sighted?

Thoughts?

BoE

[hiriskpaul]

Should you sell your bad performers to invest in the good ones? No, that makes no sense at all. What you are doing there is anchoring to the price you paid. The market does not care what you paid and it has zero importance to future return. If CGT is of no concern, the best thing for you to do is to completely forget what you paid.

Don't hang on to an investment just because you have lost money on it. Remember that there may well be better ways to make the money back than the way you lost it. Equally, don't sell duds because you cannot stand being presented all the time with your losses. A dud investment might be a very good way to make back your loss.

If you want to actively invest, forget what you have made or lost on an investment and just regularly consider whether it continues to have investment merit. Consider your expected return from the current price and the risk. If you think there is no case for the investment (poor risk/reward) get rid of it.

Even if something looks like a reasonable investment, you still might like to sell or reduce to make what you consider to be a better investment, but you should of course think about diversification as well. Farm bets don't come along very often and the downside risks of highly concentrated portfolios are seldom worth it. Not always true, but usually the case.

Another point I would make is that about 2 in every 3 shares underperforms the market each year and it gets worse as time goes on. If, as you have indicated, you have no edge, think about what it means in terms of the returns on the median concentrated portfolio if the majority of shares underperform. If you have no stock picking edge, you really need wide diversification to mitigate the risks of this market asymmetry. Perhaps you might be better off with a different approach than picking individual shares?

[TheMotorcycleBoy]

Should you sell your bad performers to invest in the good ones? No, that makes no sense at all. What you are doing there is anchoring to the price you paid. The market does not care what you paid and it has zero importance to future return. If CGT is of no concern, the best thing for you to do is to completely forget what you paid.

Don't hang on to an investment just because you have lost money on it. Remember that there may well be better ways to make the money back than the way you lost it. Equally, don't sell duds because you cannot stand being presented all the time with your losses. A dud investment might be a very good way to make back your loss.

This is contradictory. The price one paid "the market" actually underpins how much money one's made or lost on the holding!

Even if something looks like a reasonable investment, you still might like to sell or reduce to make what you consider to be a better investment, but you should of course think about diversification as well. Farm bets don't come along very often and the downside risks of highly concentrated portfolios are seldom worth it. Not always true, but usually the case.

I'm about a million miles from a concentrated portfolio. My biggest name is weighted at about 3.5% of my entire portfolio as pointed out in an earlier post.

All eggs in one basket isn't me. You might be thinking of this guy?

Another point I would make is that about 2 in every 3 shares underperforms the market each year and it gets worse as time goes on. If, as you have indicated, you have no edge, think about what it means in terms of the returns on the median concentrated portfolio if the majority of shares underperform. If you have no stock picking edge, you really need wide diversification to mitigate the risks of this market asymmetry. Perhaps you might be better off with a different approach than picking individual shares?

Hmm.. I'd much rather accept that I don't have "an edge", than try to fool myself otherwise. Thanks for the diversification advice.

Matt

[hiriskpaul]

Should you sell your bad performers to invest in the good ones? No, that makes no sense at all. What you are doing there is anchoring to the price you paid. The market does not care what you paid and it has zero importance to future return. If CGT is of no concern, the best thing for you to do is to completely forget what you paid.

Don't hang on to an investment just because you have lost money on it. Remember that there may well be better ways to make the money back than the way you lost it. Equally, don't sell duds because you cannot stand being presented all the time with your losses. A dud investment might be a very good way to make back your loss.

This is contradictory. The price one paid "the market" actually underpins how much money one's made or lost on the holding!

I agree with the second part, but I don't understand why you say "This is contradictory". What is contradictory?

What I am saying is simply that you should not judge an investment based on your past returns. It makes no difference to the investment case what you have experienced up to now. If you have lost money, it should not affect the investment case. If you have made money it should not affect the investment case. It is not at all unusual for me to lose money on my initial investment. On re-evalutaion I may then decide that the investment case has now improved and I increase the investment.

The only thing that might be affected by past returns is exposure to the asset. If something has shot up, you might want to consider reducing your exposure even if the investment case is still sound. That does not mean you should reduce your exposure, only that you should consider it. I have run some very overweight positions in the past and some highly concentrated sectoral positions. eg I was over 90% in UK bank and building society fixed income securities in the immediate aftermath of the banking crisis.

[tjh290633]

Hi TJH,

I don't execute my portfolio quite like your's (yet?), as I'm still building. As I believe you may have noted, or I've pointed out, some of my holdings are weighted more heavily than others. Typically this is based whether or not they are new holdings/ideas or older ones that I've built up. I also have a notion of how much risk I associate per stock etc.

However, after earlier conversations with you I do now report the "median" value (i.e. the weight) and the multiple of the median attributed to each holding. Indeed my largest holding currently (CRDA) has a weighting of 2x median, and 3.5% of the current market value of the entire foli. That's not deliberate - but having said that my outlook is such that I'd rather have such a holding size be roughly the maximum within the portfolio - in order to minimise company specific risk. (So thanks for making me more aware of the median concept).

I guess I have somewhere between 5 - 10 years of working life left, though I may revisit this if redundancy happens. At some point I should think then about some kind of annuity substitute accompanied with a gradual move to an income based system.

I think that your recent disposals of Marstons and Compass both make sense, without looking at the yields. With the tenacity of the WFH trend I believe that Compass's business will struggle, and I guess Marston's issues relate to pub closures and changes in drinking/eating-out habits.

thanks for sharing your words,
Matt

Back in the days when I was building the portfolio, I would reinvest cash in the lowest value share. I first trimmed overweight holdings in 1997, when I realised that LLOY were about 16% and AZN was chasing after it, at about 12% or so. I took fright and decided that 10% of my then 18-share portfolio was a good limit to set.. As it got bigger I changed that to twice the median, and still later to 1.5 times the median, which is low enough. If you set it too low you end up tail chasing, so for you I would guess that twice the median is the right limit to set. Obviously your regular inputs of cash will tend to lower the weight of the holdings, but, as I found, they can run away with you.

I still have two low yielders, in Haleon and IMI. In fact IMI is my best performing share, with an IRR of 43%, while Haleon is at 52%, but only held for about 8 months. I think that it is important to look at that IRR figure, to avoid throwing out the baby with the bathwater. For the record, I first bought IMI in 2009 at 265p. Haleon were demerged at about 240p.

TJH

[Bubblesofearth]

Any feel for which banks might do best from here? I tend to concentrate on UK listed ones, BARC, LLOY, HSBA for example. But that could be short-sighted?

Thoughts?

BoE

Morning GS (if you're up yet), looks like both of us weighing in on bank shares was enough to cause a sell-off!

Bargains now?

BoE

[tjh290633]

Any feel for which banks might do best from here? I tend to concentrate on UK listed ones, BARC, LLOY, HSBA for example. But that could be short-sighted?

Thoughts?

BoE

Morning GS (if you're up yet), looks like both of us weighing in on bank shares was enough to cause a sell-off!

Bargains now?

BoE

Look at the dividend income for inspiration. Lloyds raised the dividend and the price has slipped back. I'm not unhappy with them but it could be better.

TJH

[TheMotorcycleBoy]

Should you sell your bad performers to invest in the good ones? No, that makes no sense at all. What you are doing there is anchoring to the price you paid. The market does not care what you paid and it has zero importance to future return. If CGT is of no concern, the best thing for you to do is to completely forget what you paid.

Don't hang on to an investment just because you have lost money on it. Remember that there may well be better ways to make the money back than the way you lost it. Equally, don't sell duds because you cannot stand being presented all the time with your losses. A dud investment might be a very good way to make back your loss.

This is contradictory. The price one paid "the market" actually underpins how much money one's made or lost on the holding!

I agree with the second part, but I don't understand why you say "This is contradictory". What is contradictory?

I wouldn't get hung up over it. I sometimes get a little bit carried away with rhetoric. My point was that in the first of your paragraphs which I quoted, where alas you mention the same-old, same-old price anchoring nugget, you then of course refer to the price of an earlier purchase. And then in the second one, you mention "that you've lost money" on a purchase.

I like to reflect on the irony of the you're-naughty-you're-price-anchoring psychology professor type remarks, since actually one's purchase price, regardless underpins one's P/L position. And I'm in it to build wealth. For any business one requires awareness of this.

Knowing that I've bought (several between £28 and and £80 ish) and sold GamesWorkshop (once at £93 and once at £120) leads me to not really dwell too heavily on words of an investment psychologist guru!

What I am saying is simply that you should not judge an investment based on your past returns.

Of course not!

It makes no difference to the investment case what you have experienced up to now. If you have lost money, it should not affect the investment case. If you have made money it should not affect the investment case. It is not at all unusual for me to lose money on my initial investment. On re-evalutaion I may then decide that the investment case has now improved and I increase the investment.

Yes. IMO, the tricky part is trying to assess the validity of a price move. Is the market telling me something I don't know and should I pause for thought, or is the market overreacting?

The only thing that might be affected by past returns is exposure to the asset. If something has shot up, you might want to consider reducing your exposure even if the investment case is still sound.

Yeah that belies the times I've topsliced the odd bit of LSE:GAW, or a more recent one from NASDAQ:NVDA.

I have run some very overweight positions in the past and some highly concentrated sectoral positions. eg I was over 90% in UK bank and building society fixed income securities in the immediate aftermath of the banking crisis.

Hmm. Unfortunately my day job is currently far too stressful and brain-cell consuming to even attempt to accurately assess that type of affair. My foli is very diversified (equity wise) right. The only stuff I don't have a straight stock for is Banking or Tobacco, but I'd imagine I've got banking in a couple of my ITs.

Matt

[TheMotorcycleBoy]

Any feel for which banks might do best from here? I tend to concentrate on UK listed ones, BARC, LLOY, HSBA for example. But that could be short-sighted?

Thoughts?

BoE

Morning GS (if you're up yet), looks like both of us weighing in on bank shares was enough to cause a sell-off!

Bargains now?

BoE

Banks? Yer kidding.

I've just taken a look at 5 years of share price charts for those 3 above, and they are very unimpressive. And it looks like they all yield less than 5%, and IIRC didn't at least cut divs in the covid days?

[TheMotorcycleBoy]

Back in the days when I was building the portfolio, I would reinvest cash in the lowest value share. I first trimmed overweight holdings in 1997, when I realised that LLOY were about 16% and AZN was chasing after it, at about 12% or so. I took fright and decided that 10% of my then 18-share portfolio was a good limit to set.. As it got bigger I changed that to twice the median, and still later to 1.5 times the median, which is low enough. If you set it too low you end up tail chasing, so for you I would guess that twice the median is the right limit to set. Obviously your regular inputs of cash will tend to lower the weight of the holdings, but, as I found, they can run away with you.

Yes, that's a really interesting point - thanks for helping me confirm with that.

Each month when I unitise I get a picture of what's over and what's under. Of course sometimes it's meaningful for me to view the underweight stocks as next month's "top up targets". But of course the danger there is over watering the weeds.

So in the past few weeks I've actually topped a few that are over my median (Croda LSE:CRDA, Diageo LSE:DGE and Albemarle NYSE:ALB). They have all done well over the past 5 years, and hopefully their business models+managements will drive at least two of them on for the next 5. And so on.

Matt

[GoSeigen]

I'm also fortunate to have been long FTSE short S&P the past couple of years. It's long been my view (since 2016 at least) that we'd have a stockpicker's market for some time. This has been borne out by events I think, to some extent, with the S&P being stuffed with the overpriced FANG trash, while the FTSE has pockets of incredible value, like the banks and before that, miners.

GS

I'm finding myself increasingly in agreement with you re banks and considering upping my stake in them.

Any feel for which banks might do best from here? I tend to concentrate on UK listed ones, BARC, LLOY, HSBA for example. But that could be short-sighted?

Thoughts?

BoE

Good buying opportunity here. I think all the UK banks are okay at these prices. EU banks also being hit hard so might be worth looking at them. I've been a regular buyer of 0A1B which looks like it will be testing support around EUR20.

GS

[GoSeigen]

Good buying opportunity here. I think all the UK banks are okay at these prices. EU banks also being hit hard so might be worth looking at them. I've been a regular buyer of 0A1B which looks like it will be testing support around EUR20.

0A1B traded for a short time at EUR20, was in two minds which account to buy in and missed the opportunity. I've now purchased a few to add to previous positions at EUR21.70.

UK bank results looking very good with base rate rises feeding through to the bottom line. I don't see why the same shouldn't happen with Eurozone banks as rates rise there too. Valuations of banks still low enough to give very good returns IMO (roughly 10%pa being returned to shareholders at current prices).


GS

[monabri]

It's a bank. Something will come up to scupper returns.