BUY OR HOLD, BUT NEVER SELL!
I always have a good chuckle when I look at analyst’s ratings on the broad market. I got an even better chuckle when I read this story from FactSet:
“Despite a 4.4% increase in the price of the S&P 500 over the past month, analysts have become more pessimistic on the market based on changes to their ratings since January 1. While the number of Buy ratings dipped slightly (-0.5%), the number of Hold ratings rose 6.3% and the number of Sell ratings jumped 13.2% during the month.
Overall, 52% of the ratings on companies in the S&P 500 were Buy ratings, 43% of the ratings were Hold ratings, and 5% of the ratings were Sell ratings. At the sector level, the Energy sector has the highest percentage of Buy ratings (64%), while the Utilities sector has the lowest percentage of Buy ratings (31%).”
Yes, can you feel the pessimism? That’s a whopping 1% rise in the number of sell calls. It never ceases to amaze me. I know how the Wall Street machine works and they need you in the game, but it drives me mad how analysts will always tell you when to get into a stock, but never have an exit strategy. I’ve made most of my money in stocks over the years by being a great seller. I’m a mediocre buyer. But I’m a great seller. I don’t know how any good investor can have one side of the coin without the other. And more often than not, I find that the people who are the greatest investors don’t just have an entrance strategy, but have the exit strategy mastered….
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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15 Comments
A lot of the beginner level literature also mostly focuses on entry or how to pick stocks. Risk managment is an aside (and usually just outdated portfolio theory) and exits don’t happen until you retire or throw in the towel…
Personally, we on our desk down here often like to use our analyst recommendations as a contrary indicator – when a stock has bombed out and our analysts finally move to a sell, we so often start to look to get long.
Anon, What I love are the downgrades after a stock takes a 50% hit.
Yeah… although as much as I love to poke fun at analysts they do have a tough job.
When you look at these situations where the stock bombs out and they then go to a sell, its a case of the analysts needing firm evidence of the deterioration in fundamentals before moving – very few will bravely move before the evidence is there.
Therefore, a stock (or the market) starts to move lower as Mr Market invariably smells something. The analysts respond with “nothing has changed, but the dip!”. Mr Market moves lower and the concerns start to become more widespread. The analysts again shrug it off as its not yet “in the numbers”. Then the numbers deteriorate and they can finally say “fundamentals have deteriorated, we move to a sell”.
The moral to the story – its often better to listen to Mr Market than your analyst – its just the way it works.
Analysts are nothing but hookers looking for the next sailor to come by. The tell you to buy at the top and sell at the bottom.
Today Citigroup cut B of A from Buy to Hold. Where was Horowitz when B of A was trading @ 50 back in 2007?
Ha, yeah, when to sell. The hardest decision in all of investing!
I’m still waiting on the definitive treatise on that. It would be a multi-century classic.
Till, then, you’re on your own.
Upon further reflection:
To sell, or not to sell.
That is the question.
When in doubt follow the money.
Money managers only earn fees when people are invested in equities – the fees are the endless friction on your portfolio. They have no incentive to reduce the amount of money you have exposed to those fees because they assume you want to remain fully invested. I wonder if clients are aware of this assumption.
How else do you explain a system whereby a glorified sales manager – aka a Senior Managing Director – can pull in millions of dollars a year in income for overseeing the efforts of other overpaid financial advisors.
It amazes me that clients still haven’t wised up to the fact that the fancy cars, expensive furniture, huge and elaborate offices, are funded by the fees taken from their investment “returns”. Every dime taken from their portfolio reduces their returns so you would hope your advisor does the most for the least but sadly appearances seem to matter more to the high net worth group but maybe this is starting to change.
Anyway as someone that once worked for one of these firms, I am amazed by the sheer lack of value added provided by the vast majority of the management working inside these firms. This is the most bloated, wasteful, non-productive industry left in America. Vanguard has taken them down but they still hold their heads high somehow.
Unlike entrepreneurs they haven’t done anything to justify the millions they earn for “managing” client’s money and outperforming the market which in BS Wallstreet speak means losing less of your money than the competition.
Smart money does not exist, but dumb money surely does, and with them smart-ass glorified smoke & mirror sellers.
Almost the entire “financial industry” is an elaborated scheme of marketing for the extraction and destruction of wealth, starting the wealth of their dumb clients (and this demonstrates that having money does not guarantee being smart).
The most destructive myth of all is that everyone can beat the market. That’s why it’s still best for the average investor to buy and hold index funds, with an appropriate asset class allocation, of course.
Now don’t listen to all this mindless drivel…just go buy some “good” mutual funds and stop worrying.
Just who do you think pays all the bills on financial sites such as this one?
Certainly not the tooth fairy. Even the king of altruism – Ken Fisher has a posting here today. How low can one go?
Thanks for the reminder of how bad analysts advice really is.
I did sell a couple of holdings in the past month
EUO (after a decent gain, then on the way down), shorting the Euro vs the dollar
CIM (collected some nice dividends, sold for a bit of a profit)
SJT (collected some nice dividends, but lost 11%).
It really is the hardest thing for an individual investor to figure out, when to sell…maybe you could do a piece on that…
“Mastered the sell side” How does one do that??
It sounds like a practiced skill that can be
learned. How?? Where?? When?? Any links
to sites to begin my education ??
Bob, I think Cullen meant when to get out, pair risk or take profit. as opposed to shorting. I may be wrong though. Shorting is a psichologically draining and depressing profession. can be vastly profitable but not for a common man.
Bob, I am a simple investor, sticking to Vanguard and Fidelity indexes. I enter equities when there has been a correction or bear and there has been 2 weeks of the indexes showing increases. Went long in equities on 10-14-11 and am watching the market carefully this week to see if I should exit (market was down last week and is down so far this week). So I do just the opposite to exit. I exit equities after a run up and the market shows 2 weeks of declines. You don’t catch the top and you don’t call the bottom, but the strategy does pretty good. Beating my Fidelity managed account so far and am considering closing it out. Any comments from some of the veterans? I do admire your knowledge and you have taught me a lot.