Thoughts on Selling: How I'm Going to Liquidate TogaPF
Most attention in investing is directed toward the purchase decision: what to buy, when to buy, how to buy. Much less attention is devoted to when to sell and how to sell.
These are tricky questions, and they are questions that I haven't spent much time on before. Like Buffett, my favorite holding period is ideally forever. Unfortunately, I've often fall into the trap of getting too attached to my investments and not looking actively enough to figure out the proper selling conditions for them.
There are really only a couple scenarios in which it makes sense to sell:
1. The investment rationale changes
There could be any number of negative events that could trigger this: the competitive landscape could change, the financials could deteriorate, the company could be running out of cash, and the management team could turn out to be a bunch of swindlers. For example, when credit card processor Heartland Payment Systems suffered a security breach earlier this year, I basically dumped it the next day, taking a huge loss in the process. There was a fundamental change in the business, and I was no longer interested in owning the shares. This is probably the simplest sell decision to evaluate. Note that this is different from simply selling when the price has dropped by 50% or more. If there hasn't been a corresponding business change to explain the loss, then the price drop just means the stock is cheaper to buy.
2. Switching to a better investment elsewhere
This is selling to raise funds to buy another stock that may provide a better risk/reward scenario. This one is a little trickier for me, as the question becomes whether I'm sure the investment I'm switching into is actually better than the one I'm switching out of. To me, there needs to be a clear advantage in order to justify the switch. For example, I switched out of index funds to buy BRKB at the end of last year to get both a tax loss writeoff while getting a good price on Berkshire.
3. When the investment has appreciated to "full-value" or "over-valued" status
This is the most difficult to assess in my opinion. What exactly does it mean to be fairly valued or over valued? If the market wants to create a bubble around my investment, then I don't want to sell out too early. I've read that many managers will let their winners run unless there has been a fundamental change in the business. The other way to address this is to set a cap as to how large a single position can take in your portfolio, say 25%, and to reduce the size of the position once it exceeds that allocation.
---------------
The reason I've been thinking about selling is that I'll be liquidating a good majority of the TogaPF portfolio in the coming months. I basically want to extract about $60k cash come July/August. Regarding how best to optimize this, I've come up with the following:
1. Pro rata liquidation across time.
Probably the most common-sense approach. I basically sell a bit of everything at set intervals so that I have the $60k and the same portfolio at a smaller scale. However, the transaction costs for this may be somewhat high. There will be also some tax consequences as I'd be selling some investments with short-term gains.
2. I can categorize the holdings into "keepers" and "everything else."
And "everything else" would be sold. This is a bit like pruning the portfolio for just the best holdings. This simplifying exercise is also useful to think about what I would keep under all circumstances. So here are my holdings ranked in reverse order:
Sold!
17/18. Jan '10 Puts on Microsoft and Autodesk. Both are now out of the money, and assuming that I just hold onto them until expiration, I can earn another $1k out of them. I sort of messed up here; I shouldn't have written puts for 12 months out. If I sell now, I will have made about $1k on them, but there is just still too much time value embedded in these. In any event, writing puts has always been a form of getting higher yields on cash for me anyway.
16. Freeport McMoran (FCX). Now that there's been a run-up in the shares of this copper, gold and molybdenum miner, I find myself clueless as to what the fair price of this should be. I'm contemplating writing some calls on this to get a little extra income on it before I sell.
15. Jan 2011 USO Call spread. USO has been so disappointing with its roll spread problems. I still believe this will play out by 2011, but I may need to unwind it while I still can.
Going...
11/12/13/14. Autodesk / Digital River / Giant Interactive / NVIDIA. Now we're moving toward stocks that I don't want to sell. All of these technology companies have huge net cash balances and decent businesses that would do well in an upturn.
10. ATP Oil & Gas. Speculative oil & gas play that dropped to prices far below the value of its assets.
5/6/7/8/9. BP / Intel / Johnson & Johnson / MMM / Nokia. The big dividend payers. It would be nice to hold on to these as long as I can. If I had to choose among these, I would keep JNJ and NOK first.
Keepers:
4. Diageo. I would like to buy more - can't think of selling this now.
3. Chesapeake Preferred. I got these yielding at about 11%, and it's also appreciated about 50% since I got them.
2. Columbia Sportswear. I really like this company. Everything about it makes sense to me as an investment: simple business model, fat FCF generation, huge management ownership stake, large cash balance, big dividends/share repurchases. I've run out of synonyms for big.
1. Berkshire Hathaway. Was there any doubt? I don't expect to get these at such prices again anytime soon. Unfortunately, this is also my largest holding.
These are tricky questions, and they are questions that I haven't spent much time on before. Like Buffett, my favorite holding period is ideally forever. Unfortunately, I've often fall into the trap of getting too attached to my investments and not looking actively enough to figure out the proper selling conditions for them.
There are really only a couple scenarios in which it makes sense to sell:
1. The investment rationale changes
There could be any number of negative events that could trigger this: the competitive landscape could change, the financials could deteriorate, the company could be running out of cash, and the management team could turn out to be a bunch of swindlers. For example, when credit card processor Heartland Payment Systems suffered a security breach earlier this year, I basically dumped it the next day, taking a huge loss in the process. There was a fundamental change in the business, and I was no longer interested in owning the shares. This is probably the simplest sell decision to evaluate. Note that this is different from simply selling when the price has dropped by 50% or more. If there hasn't been a corresponding business change to explain the loss, then the price drop just means the stock is cheaper to buy.
2. Switching to a better investment elsewhere
This is selling to raise funds to buy another stock that may provide a better risk/reward scenario. This one is a little trickier for me, as the question becomes whether I'm sure the investment I'm switching into is actually better than the one I'm switching out of. To me, there needs to be a clear advantage in order to justify the switch. For example, I switched out of index funds to buy BRKB at the end of last year to get both a tax loss writeoff while getting a good price on Berkshire.
3. When the investment has appreciated to "full-value" or "over-valued" status
This is the most difficult to assess in my opinion. What exactly does it mean to be fairly valued or over valued? If the market wants to create a bubble around my investment, then I don't want to sell out too early. I've read that many managers will let their winners run unless there has been a fundamental change in the business. The other way to address this is to set a cap as to how large a single position can take in your portfolio, say 25%, and to reduce the size of the position once it exceeds that allocation.
---------------
The reason I've been thinking about selling is that I'll be liquidating a good majority of the TogaPF portfolio in the coming months. I basically want to extract about $60k cash come July/August. Regarding how best to optimize this, I've come up with the following:
1. Pro rata liquidation across time.
Probably the most common-sense approach. I basically sell a bit of everything at set intervals so that I have the $60k and the same portfolio at a smaller scale. However, the transaction costs for this may be somewhat high. There will be also some tax consequences as I'd be selling some investments with short-term gains.
2. I can categorize the holdings into "keepers" and "everything else."
And "everything else" would be sold. This is a bit like pruning the portfolio for just the best holdings. This simplifying exercise is also useful to think about what I would keep under all circumstances. So here are my holdings ranked in reverse order:
Sold!
17/18. Jan '10 Puts on Microsoft and Autodesk. Both are now out of the money, and assuming that I just hold onto them until expiration, I can earn another $1k out of them. I sort of messed up here; I shouldn't have written puts for 12 months out. If I sell now, I will have made about $1k on them, but there is just still too much time value embedded in these. In any event, writing puts has always been a form of getting higher yields on cash for me anyway.
16. Freeport McMoran (FCX). Now that there's been a run-up in the shares of this copper, gold and molybdenum miner, I find myself clueless as to what the fair price of this should be. I'm contemplating writing some calls on this to get a little extra income on it before I sell.
15. Jan 2011 USO Call spread. USO has been so disappointing with its roll spread problems. I still believe this will play out by 2011, but I may need to unwind it while I still can.
Going...
11/12/13/14. Autodesk / Digital River / Giant Interactive / NVIDIA. Now we're moving toward stocks that I don't want to sell. All of these technology companies have huge net cash balances and decent businesses that would do well in an upturn.
10. ATP Oil & Gas. Speculative oil & gas play that dropped to prices far below the value of its assets.
5/6/7/8/9. BP / Intel / Johnson & Johnson / MMM / Nokia. The big dividend payers. It would be nice to hold on to these as long as I can. If I had to choose among these, I would keep JNJ and NOK first.
Keepers:
4. Diageo. I would like to buy more - can't think of selling this now.
3. Chesapeake Preferred. I got these yielding at about 11%, and it's also appreciated about 50% since I got them.
2. Columbia Sportswear. I really like this company. Everything about it makes sense to me as an investment: simple business model, fat FCF generation, huge management ownership stake, large cash balance, big dividends/share repurchases. I've run out of synonyms for big.
1. Berkshire Hathaway. Was there any doubt? I don't expect to get these at such prices again anytime soon. Unfortunately, this is also my largest holding.
posted by Henry at
11:37 PM
0 Comments
