Posted on Wallstraits: Switching Stocks Switching Stocks Out with the old, In with the new We seem to have several lively discussions (e-mail and forums) this week about selling stocks. One of the topics that I believe is particularly important is the idea of switching, or selling one stock in order to buy another, nearly simultaneously. The switch is usually predicated on the belief that the stock being sold is overvalued, while the stock about to be purchased (with sale proceeds) is more undervalued (and/or has brighter future prospects). I was writing a recent review of legendary growth stock investor Philip Fisher's little known book Conservative Investors Sleep Well, when I came across this quote about switching: Philip Fisher (1975, as discussing when to sell stocks that meet his stringent screens): "In my opinion there are important reasons such stocks should usually be retained, even though their prices seem too high: If the fundamentals are genuinely strong, these companies will in time increase earnings not only enough to justify present prices but to justify considerably higher prices. Meanwhile, the number of truly attractive companies in regard to the first three dimensions is fairly small. Undervalued ones are not easy to find." "The risk of making a mistake and switching into one that seems to meet all of the first three dimensions but actually does not is probably considerably greater for the average investor than the temporary risk of staying with a thoroughly sound but currently overvalued situation until genuine value catches up with current prices. Investors who agree with me on this particular point must be prepared for occasional sharp contractions in the market value of these temporarily overvalued stocks." "On the other hand, it is my observation that those who sell such stocks to wait for a more suitable time to buy back these same shares seldom attain their objective. They usually wait for a decline to be bigger than it actually turns out to be. The result is that some years later when this fundamentally strong stock has reached peaks of value considerably higher than the point at which they sold, they have missed all of this later move and may have gone into a situation of considerably inferior intrinsic quality." Fisher raises some interesting and important ideas. First, it is no easy task to find the perfect stock. Actually, there is no perfect stock, so when one comes anywhere close to perfection you should think long and hard before selling it, even when it appears temporarily richly valued after a strong price runup. We have faced this issue in our Wallstraits 8 Portfolio with core holding Osim International. Our original (split-adjusted) May 2001 purchase price was 28 cents/share, with a total investment of about S$88,000. Today, Osim has risen to 72 cents/share, and our $88,000 has grown to $238,000, or a 168% total return (including dividends). That's an almost frightful gain in just a little over one year. Fisher's advice is... "even though their prices seem too high: If the fundamentals are genuinely strong, these companies will in time increase earnings not only enough to justify present prices but to justify considerably higher prices. Thankfully, we avoided the sell instinct as Osim was rising over the last year. How? By taking Fisher's advice and going back to our 8 Screens. Osim's fundamentals were not only genuinely strong, but were improving quarter by quarter. Without this logical and rational switch-check process in place, I'm quite sure we would have been strongly tempted to bag a profit somewhere along the way... maybe 25%, maybe 50%, maybe 100%... Fisher's second keen insight deals directly with switching from one stock already in your portfolio to another that looks attractive. He seems to advise against the switch with the reasoning: "The risk of making a mistake and switching into one that seems to meet all of the first three dimensions (Fisher's screens) but actually does not is probably considerably greater for the average investor than the temporary risk of staying with a thoroughly sound but currently overvalued situation until genuine value catches up with current prices." Switching from a proven core holding to a unknown new holding is dangerous stuff according to Fisher (and he was drawing on decades of knowledge and a very strong track record). Not all holdings in your portfolio may be "core" holdings. Some of these minor holdings, or holdings that are showing a decay in fundamentals may reasonably be considered switching candidates when a newcomer scores very high on your screens. I think the key is to stay as unemotional as possible, rely on and trust your screens, and stick with your rare winners as long as they continue to show good business progress. Patience and logic.
Previous Philip Fisher articles
1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well
Wednesday, September 03, 2008
Philip Fisher Articles: Switching Stocks
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3 comments:
hi moola, what if the stock that we are holding are speculative in nature (which of course have taken quite a beating already by now). Would it be wise to sell at a huge loss now and buy something that is fundamentally sound? Please advice. Thanks.
Dearest Jo,
Here is my humbe thoughts on this issue or rather this is what I would have done if it was me.
If I had bought a speculative issue, the biggest thing I need to remind myself is I am speculating on an event.
Now if and if this event did not plan as how I had anticipated, the very first and utmost important thing I need to do is I need to realise and acknowledge that I have erred. I had made a mistake.
And what's the most logical thing for one to do?
Isn't it to own up to our mistake(s)?
And after owning the mistake(s) we need to do the right thing, which is to correct it.
And in the stock market, the only right thing to do is to sell the stock.
In my opinion, to hold the stock and hope that the market will be kind to us is simply a game of chance. A game which is never ever truly fair. Sometimes some can get lucky and the market turns their mistake into a golden child. Sometimes the market is simply cruel. For me, I would rather be in control of my own fate, which is why I would always sell once I realise that there are no longer any justification in my speculation. Even if such action would hurt big time.
And for me, after selling, there is always the other option, which is to hold cash.
Yes, hold the cash, and wait for a better opportunity.
There is no rule stating that once you sell your 'rotten eggs' you must buy another stock.
Being patient and holding cash should always be considered as a viable option.
Hope my second opinion helps.
Do understand what works for me, might not work for you. Ok?
moola, thanks for your prompt reply to my question. I am very much a novice investor (if this is the right word to term myself I don't know) and my problem is I entered the market early last year like a real sucker. Followed people's recommendations blindly and put in over a couple of hundred K. If I sell them now, I would get back perhaps less than half of what I invested and that hurts bigger than big. I admit my mistakes and I want to make it right. I just don't know how to. Actually I am not even sure if the stocks I have in my portfolio are speculative but I know for sure, a few are, one of which has been delisted already! :(
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