Saturday, February 25, 2017

What does Buy & Hold mean?

Like any concept used in this world, and this seems in particular to be true for the world of investing, how a concept is understood and applied is often in the eyes of the beholder. So when talking ‘Buy & Hold’ to me that doesn’t mean that I never sell a stock once I buy it. Actually, if you read my last post you know that I recommend selling stocks to build up lots of cash because ‘the higher a market goes, the higher the risk’.  So, when do I sell a stock?

1.       A stock has gone up so much that it is taking up an unreasonable proportion of my portfolio. Lately, I have trimmed a lot of my bank holdings. The official term is ‘rebalancing my portfolio’.

2.       A stock has dropped from it’s recent high or it’s recent purchase by more than the allocated stop-loss price. Typically, 20-25% from a recent high or from the purchase price. However, in volatile sectors like gold mining I may use a stop-loss at 40 or 50% price drops. If you invest no more than 5% of your security portfolio in one stock and you lose 25% then your total portfolio loses around 1.2% If you add to that the idea of buying in tranches, i.e. when you start buying shares in a company just buy a little bit do not buy the full 5% in one fell swoop. So now, if you made a mistake and you put only 1% of your securities portfolio in a particular stock your loss is only 25% of 1% or 0.25% of your total securities portfolio value. If you are like me and have around 50% of your net worth invested in real estate, then your total net worth is down 0.125%.  You see that way you keep your losses to a minimum and if you have a big winner you let your profits ride – sometimes for years and you buy more and more of this now proven asset up to the max 5%.

3.       A stock is ‘dead money, i.e. it pays no or little dividends and more importantly the reasons you bought it are no longer there and the price hasn’t moved significantly for 1 or 2 years. These stocks I tend to sell especially when I see a downturn coming. After all, why live through the stock value fall and lose 20 or 30% in a downturn with little upside? Especially, If you can convert it into cash and use that cash to buy a more desirable asset during the anticipated down turn?  Makes sense?

So rarely do I truly ‘Buy & Hold’ for ever.  Having said that, some stocks like Brookfield Asset Management I have been holding literally for decades and I only sell a bit if it becomes too large a portion of my portfolio. This strategy of buy and hold makes we sleep very well at night. A large portion of my portfolio requires very little attention and this allows me to focus on trying to find new opportunities to invest in. I try them out and monitor them closely in the more active portion of my portfolio. Some people call this ‘play money’ but you know I don’t ‘play with money’. I am willing to invest in new companies and may have fun when proven right (30 to 50% of those investments don’t work out and are sold within a year or so) but it is for growing and optimizing my portfolio and I am certainly not very cavalier about losing even a small part of my nest egg. In the end, I may have to live off this money for decades to come and if immortality is possible, I may have to live off it forever. 😊

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