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Maybury

When to sell,
and why

By Richard J. Maybury

 

Reprint from the August 2010 EWR

 

One of the things I'm most proud of is EWR's focus on what I regard as the two overwhelmingly dominant investment trends — more war, and more debasement of currencies. These have been our main concern for more than two decades, since the Berlin Wall fell, and have yielded wonderful results.

The two trends have been in effect for so long, and now show so many signs of strengthening, that I've rarely sold anything, and don't expect to for years.

However, sometimes one or more of our investments takes a sharp drop, and readers wonder…

…should they sell?

Markets are huge information processors. If the price of an investment reflects everything generally known about it, and if the price reacts instantly when new data appear, how can we beat the market?

Not by having better data. In the age of the Internet, this is almost impossible.

We do it by having a better model for understanding the data.

As I see it, any investment analysis is in two parts, internal and external. Internal refers to the condition of the investment itself. External is the economics, geopolitics and other "Big Picture" outside factors that affect the investment.

I have virtually no inside information. Never in my life have I had a microphone planted in a boardroom.

What I do have is what I regard as a clearer way of seeing how investments are affected by the externals.

How much do we know?

Thousands of the people with whom we are competing are professionals with platoons of researchers and rivers of information at their fingertips. Do we really know what they don't?

An assumption of this newsletter is, yes we do. We have a good background in Austrian economics, which has a much better track record than Keynesianism. We know a good deal about 2,500 years of economic history. And, my military experience helps, as you will see on pages 3 to 8.

These three advantages combine to give us insights no one else has, or at least no one I've ever met. This, I think, makes us one of the best at the Big Picture.

Surprises

In every case so far, if something we own has taken a big drop, it was as much a surprise to me as it was to you. Usually there was something secretly happening inside the company that I did not know about.

Here will be …

…our procedure from now on

If an investment drops, I see four possible reasons: (1) It got caught in a temporary wave of fear-driven selling that has little to do with the investment itself, and it will recover. This is the most common reason. (2) Gloomy information about the investment's internals came into the market. Also common. (3) One or both of the two long-term trends has changed. (4) The investment's ability to profit from these trends is damaged and will not recover.

If something drops and you don't hear from me, you can assume I believe the cause is number 1 or 2, and I'm not selling. Money we've lost is gone, we cannot do anything about it, but I think that from the new price base, the investment is still promising.

If I think it's number 3 or 4, I will say something as soon as I can compose my thoughts and let you know.

Selling to take profits

Here are two automatic procedures for selling that you may want to consider.

For the upside, when the price doubles, sell half. This recovers your original investment, so from then on you are playing with "free" money.

For the downside, use stop loss orders. The theory behind stop loss is that if the price drops more than, say 25%, then that's the market announcing that you've made a mistake; you are automatically sold out.

Many brilliant people swear by stop loss orders, and have made good use of them. But markets now are so laden with politics that I think sharp downward spikes that stop you out and then come right back, as in the May 6th Flash Crash, will become increasingly frequent. Perhaps the best approach is to use stops until they no longer work for you.

I make mistakes

Let me remind you, EWR is more or less a chronicle of my own investing, so I never recommend something I think will go south. I accept no commissions, fees or any other form of kickback, so I have no incentive to suggest what I would not buy myself.

Therefore, if you are losing money in something I recommended, it's a near certainty I made a mistake and I'm losing, too. It happens. I'm sorry.

Summary

Looking back over the two decades since the Berlin Wall fell, in every case I can remember, when we lost money, the external part of the analysis — the Big Picture — was right, but there was a secret part of the internals that we could not see.

The operation was a success but the patient died.

I'd like to give you some kind of hard and fast rule for selling, but there just isn't any. I don't know your personal circumstances, including your tax situation, or your emotional ability to handle risk.

Selling after a doubling seems like a good tactic for everyone, but beyond that, I don't know what to say.

For my own portfolio, I almost never sell. A lot of my assets — and profits — go back 20 years or more, and I expect to hold them at least another 10, because I think the two dominant long term trends are still in their infancy.

You need to have a financial advisor or broker who knows your personal situation, plus Austrian economics, and follows the two trends. If you don't have one, you might call one of those on our list of Recommended Specialists on the Subscriber Access section of this website. ♦