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Welcome to the Supernatural Stocks Podcast on Moneyweb, hosted by The Finance Ghost, your go-to source for local and international insights tailored for investors and traders.

Recently, I received a suggestion via social media to talk about the timing of selling stocks on Supernatural Stocks. This is arguably one of the most complex aspects of investing, but I’m eager to dive into it. Thank you for your suggestions, and keep them coming!

Option 1: This stock is for sale in two-thousand-and-never!

There was a time when people believed that ‘Diamonds are forever,’ a sentiment famously pushed by De Beers. However, the emergence of lab-grown diamonds has changed that narrative.

This serves as a vital lesson for anyone who thinks they can hold onto a stock for eternity.

Even Warren Buffett has made the choice to sell shares when necessary and has often regretted it when he saw the stock price rise after his sale.

This brings up two further insights:

1. Being a long-term investor doesn’t imply that you should never sell; and
2. You’ll drive yourself mad if you retroactively analyze every decision with the gift of hindsight.

That said, learning from mistakes is crucial. Make sure to differentiate between genuine errors and the unattainable goal of perfect timing.

Here’s a lesson I learned the hard way: Transaction Capital.

Among local stocks, this was my ride-or-die; my “forever” stock.

SA Taxi initially appeared to be a great business. Sure, hindsight is 20/20 – but if Sabvest stumbled and Chris Seabrooke was almost entangled with Transaction Capital, how could we, as regular investors, perceive the underlying issues?

Additionally, Transaction Capital Risk Services (now Nutun) was a strong foundation, with WeBuyCars positioned as the growth engine in which I had considerable confidence. My earlier collaboration with the Transaction Capital management team made me believe I understood their capital allocation abilities.

I was inevitably set up for disappointment. Why? Because I was naïve. I’m not just talking about the business collapse due to the pandemic’s effect on SA Taxi – that’s market randomness you can’t predict, reason why it’s called risk. I’m referring to the valuation.

I should have sold when the share price soared.

I particularly should have sold when the head of the TCRS business at the time sold shares. I recalls weighing my options but ultimately chose greed over prudence.

What’s that saying about pigs? Ah yes, bulls and bears earn money, but pigs – pigs get slaughtered. I was the pig. I got slaughtered.

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While I faced losses due to what ultimately revealed a severely flawed balance sheet, I must confess I deserved it. I had labeled a stock as “forever.”

Conditional love. That’s the type of love you need for your stocks.

Save the unconditional, forever-nothing-will-change love for your kids, and perhaps your dog – or in my case, my cat. And most definitely pay attention when executives are liquidating shares that are evidently overpriced. Such signals are crucial, irrespective of your feelings towards a stock.

Option 2: There’s a price and I’m sticking to it

Let’s enter the trading domain. You set a target price, utilizing technical indicators to determine timely entry points, employing everything from momentum indicators to some esoteric methods that bear a slight resemblance to tea-leaf reading.

However your initial decision is made, a clear strategy generally exists for your exit. You identify a price at which you’ve decided to sell. In fact, you likely entered that order into your trading system already.

This falls under trading, not investing. If held longer, it may shift into the realm of swing trading, where positions are allowed greater time for development. Nevertheless, the sale price is influenced by factors such as pivotal resistance points or Fibonacci levels, rather than cash flow multiples at that moment.

Top traders excel at two primary skills:

1. Reading charts – interpreting the market; and
2. Following a plan.

Engaging with traders or listening to trading podcasts reveals a notable insight: most regrets stem from failing to adhere to their trading plans. In essence, it’s about not selling at the target price they had pledged to themselves – seeking to hold out for more instead.

It appears traders and investors share more commonalities than one might expect, right? The pigs get slaughtered in both scenarios.

Option 3: The best of both worlds

Stating that you will hold onto a stock indefinitely is undoubtedly problematic. Defining a specific target price for a short-term sale places you firmly in the trading camp rather than the investing one, making it necessary to consistently hunt for new opportunities instead of allowing your investments to compound over time.

So, is there a midpoint?

Absolutely. A wide spectrum exists in between; various styles and strategies abound. This complexity makes the topic intriguing. It also underscores the importance of outlining two extremes to better grasp the distinct strategies available.

What follows is a framework I find efficient and often apply myself. I’ve devised it, and I’m always receptive to feedback, particularly constructive criticism!

Question 1: What is the chart indicating?

I intentionally begin with the chart rather than external factors you should analyze separately. Why? Because the market consists of multiple participants examining the same asset as you, making the chart immensely valuable. Why not consider their insights instead of relying solely on your own from the get-go? It’s akin to polling the audience on Who Wants to Be a Millionaire? – except you can do this continuously, not just once as a lifeline.

In straightforward terms, is the chart heading upward towards the upper right corner, or does it exhibit signs of consolidation or decline?

Momentum stands as the most potent force in the market, capable of driving prices to irrational peaks, significantly benefiting those who maintain their positions.

Traders ‘let their winners run,’ and with good reason. Yet, they also diligently monitor for when the exit sign starts to shine brightly.

When a stock gets over-extended, it’s a cause for concern. However, if growth potential remains strong and momentum is still intact, it may not yet be time to sell, or risk regretting it later.

Begin with the chart and see what market participants are indicating before applying your analysis.

Question 2: What does common sense suggest?

You won’t find this depicted on a chart. Ironically, common sense isn’t always prevalent. People often cling to beliefs that resonate with their current circumstances. When situations appear favorable, they’ll rush to unearth more reasons to validate those beliefs. This behavior exemplifies the confirmation bias that we all often display.

Therefore, relying solely on charts is insufficient. Indeed, momentum is compelling – but once it fades, a stock’s price can plummet rapidly. In the span of a coffee brew, a stock’s price could nosedive by 15%, leading to frustration unless you’ve set trailing stop losses that adjust as the price creeps up.

So why emphasize common sense? Because a more easily understood business is typically less risky to hold.

Reflecting on the Transaction Capital case – it certainly was a complex entity with myriad underlying risks, many of which I conveniently overlooked due to my excitement about WeBuyCars. We know how that chapter concluded. Fortunately, I now hold a direct position in WeBuyCars, which has performed exceptionally well this year.

Am I at risk of repeating the same mistake with WeBuyCars? The difference is that WeBuyCars operates as a straightforward business.

Multiple straightforward factors suggest they can continue to thrive and gain market share. There’s no need to sift through extensive notes on financial derivatives to grasp their profit-generating potential. A simple visit to WeBuyCars or selling them your car suffices. Regrettably, I couldn’t experience SA Taxi as a customer, nor did I grasp all the intricate risks linked to that operation.

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I believe this makes it simpler to continue holding WeBuyCars, though certainly not indefinitely – we’ve already established that blind affection belongs to your offspring, not your investments.

Question 3: What do the multiples indicate versus averages?

Finally, if there’s substantial trading history, compare current multiples against historical trading levels. Yes, a share price may have soared significantly, but if profits have kept pace and multiples reflect historical averages, then who cares? It stands to reason if price increases align with profit growth.

A critical distinction exists between a share price trading at a price-to-earnings (PE) ratio of 15 times following a 50% increase or 25 times under the same conditions.

If the long-term average sits at, say, 20 times, then the former presents a stock priced below its average despite the surge, whereas the latter signifies a stock that has surpassed its average and risks a retreat.

In both instances, the share price has appreciated by 50%, meaning the percentage return is identical. However, I’d feel significantly more comfortable holding the first stock, hoping it rebounds to its average, while the second merits trimming or a total sale in anticipation of a multiple contraction.

Closing thoughts: Churn and taxes

Be wary of overly complicating when to sell.

Selling incurs taxes, which can affect your long-term gains, especially since you might face income tax if selling within three years rather than capital gains tax. Consequently, your compounding occurs annually using post-tax returns, whereas those who hold are compounding pre-tax figures.

This is partly why fund managers gain a competitive edge in the market; fund structures generally avoid taxation when adjusting positions.

Lastly, consider the costs of frequent trading. It’s not solely your brokerage fees but also the time spent monitoring the market (which comes with a cost) and potential gains you might miss out on by selling too quickly.

Over the long term, markets tend to appreciate. Isn’t that the reason behind your investment?

The most successful companies will continually reach new heights. That’s what we aspire to.

Exercise caution when selling, but don’t entirely dismiss it, as I’ve certainly learned through experience.

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