Tag Archives: setpageviewname

Choosing Which Stocks To Sell For A Big Purchase

Summary This article outlines the thinking process of needing to sell some stocks for a big purchase. Know how much cash is needed to liquidate from stocks, so as not to sell more than needed. Must keep emotions in check, and sell stocks based on company valuation and future prospects of the business. Here’s a little background story to my situation. The Situation of Being Carless I recently sold my 2001 Toyota Echo. I bought it used about three years ago. The odometer indicates mileage of over 320,000km. While I owned it, other than the usual maintenance, I replaced the battery and the exhaust pipe. I managed to sell it for $500 less than my buying price. Not too shabby. I’m not one who drives a lot, but I only noticed how inconvenient it is after I sold the car. Now, I’m looking for another car. I’m still debating whether to buy a new car or a pre-owned one. Someone that knows a lot more about cars than me said that it’s probably better to buy a new one now that I got several years of driving experience down my belt. Further, it could be risky buying a pre-owned car because I don’t know its history. The previous owner could also have hid facts about crashes the car had experienced or changed the odometer. The ideal situation is that I anticipated I’ll need to “invest” in a car a couple years before and actually saved up for it. As we know, the general principle is to not put money into the stock market if you plan to use it within 5 years. The reality is I did not save up, and I don’t have a lot of cash on hand. So, other than to stop buying stocks in the meantime, I also needed to sell some of my shares. Emotionally, I don’t want to sell at a loss, and some of my holdings are in the red, especially energy companies. At the same time, I also want to take profit in my biggest winners. However, the better way is to try to suppress my emotions, and look at valuations and future earnings estimates instead. So, I should be looking at the valuations of all of my holdings and deciding which ones are possible sells. I especially don’t want to sell my core holdings, but if they’re excessively overvalued, or I feel less comfortable with them for some reason, it might make sense to take some shares off the table and take some profit. Unfortunately, I made some sales before I wrote this article. I notice I’m much more logical and less emotional when I rethink the process in writing. How did I Choose What to Sell? It is through this event that I realize more prominently that I’m less comfortable with some stocks than others. In other words, this exercise more critical helps me determine what I should be holding or not. Further, I also look at valuation, as well as compare a holding’s future prospects with others. Another consideration is gains. The market is uncertainty; it could drop 25-50% for whatever reason at any time period. Still, I would probably regret later by selling some shares in my winners, as some would be against clipping the wings of their winners. Royal Bank of Canada Royal Bank of Canada (NYSE: RY )’s shares are fairly-valued today. F.A.S.T. Graphs shows consensus analyst estimates of 4.7% earnings growth going forward. Adding that to its current yield of 3.9%, it indicates an estimated return of about 8.6% in Royal Bank shares today, which is an acceptable return for a blue chip investment. In Q2 2015, 63% of Royal Bank’s revenue came from Canada. The housing bubble has been the topic at the dinner table in recent years, especially in popular cities such as Vancouver and Toronto. The fear is that the average income cannot pay for the average housing prices. In January 2015, the Huffington Post’s article shows the income you need to buy an average house across Canada . In Toronto, an average household income of C$113,009 is needed for an average-priced house or condo of C$587,505 at the low mortgage rate of 2.99%. The monthly mortgage payment turns out to be C$2,560. If rates rose to 6%, the 2005 rate, the required household income would be raised to C$143,182. It’s worse in Vancouver. An average household income of C$147,023 is needed for an average-priced house or condo of C$819,336 at the low mortgage rate of 2.99%. The monthly mortgage payment ends up being C$3570. If rates rose to 6%, the 2005 rate, the required income would be raised to C$190,581. Of course these numbers are just that — an average. And it also makes a difference how much down payment a family has saved up. Still, it doesn’t change the fact that housing prices have been on the rise for over a decade in those cities. And with income levels misaligning with housing prices, there could be a ripple effect if the prices started to drop. I sold some shares in Royal Bank, and will continue monitoring, but I want to emphasize that if I had cash on hand to make my purchase, I wouldn’t have sold my shares. Baxter International I started a position in Baxter International (NYSE: BAX ) as a non-core. Then, I made it core. And now I sold out of it. It was a small position and I suppose I wasn’t strongly attached to it. I sold it essentially at breakeven. I might still receive a tiny position in Baxalta, as I sold it on June 16, but the settlement date is a few days later, while the company spins off the Baxalta shares to shareholders as of the record date of June 17. If I do receive shares of Baxalta, I’ll be monitoring it and decide if I want to add to the position later on. Starbucks Some of you might stare in disbelief that I sold some shares of Starbucks (NASDAQ: SBUX ). It has been one of my biggest winners with 50% gain. The high P/E is scaring me a little. I certainly wouldn’t add shares at a P/E of 36. Looking at the F.A.S.T. Graph below, it’s at the high end of its valuation. (click to enlarge) If it trades sideways again, so that earnings catch up some, I might add to my position again. Actually, I should have sold McDonald’s (NYSE: MCD ) before selling Starbucks because Starbucks has better future prospects. However, my McDonald’s shares are below my breakeven point, and psychologically, it’s hard for me to separate from those shares at present levels. That said, in hindsight, I shouldn’t have bought McDonald’s at the price that I did. And a thought just came to me…I should have sold McDonald’s at a small loss and kept my Starbucks shares because I believe Starbucks will outperform McDonald’s in the future. Whoops, I guess I should have written this article before I took action. I’m still a bit short on cash, so I might revisit my decision on McDonald’s next week. Microsoft Lastly, I sold some shares in Microsoft (NASDAQ: MSFT ). The other technology companies I hold are International Business Machines (NYSE: IBM ) and Qualcomm (NASDAQ: QCOM ). IBM is a core holding that I believe is much more undervalued than Microsoft. IBM’s P/E is under 11 and Qualcomm’s is under 14, while Microsoft’s is under 18. Consensus analyst estimates Microsoft’s earnings to grow at 6.7% in the near term, Qualcomm’s to grow at 1.3%, and IBM’s to grow at 5.1%. If I didn’t need the money, I wouldn’t sell the Microsoft shares because they’re not excessively overvalued. In Conclusion Looks like I couldn’t keep my emotions entirely at bay, but in writing this article, I believe my thought process became clearer and less sentimental. It would certainly have helped if I had a set of rules for selling stocks ahead of any sales based on allocation, diversification, quality, valuation, and future prospects. Ask Yourself Do you need to sell some of your stocks to make a purchase? Do you have a set of rules to determine what to sell when you need to? Do you ever sell for the sake of taking profit off the table to preserve gains and capital? If you like what you’ve just read, please consider clicking the “Follow” link at the top of the page, above the article title, to receive an email notification when I publish a new article. Disclosure: I am/we are long IBM, MCD, MSFT, QCOM, RY, SBUX. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: I’m not a certified financial advisor, and this article is not advising to buy or sell any security. Please use it as initial research.

Investors – Your Hair Is Not On Fire, You Don’t Have To Get Out Of The Market

Summary The media woods (including Seeking Alpha) are full of dire predictions of market corrections, retrenchment, collapse, from anticipated Fed interest rate hikes, Greek intransigence in the EU, Putin’s Ukranian grab. Oh, woe! It’s all bad. ISIS amok. Massive panicked African emigration to Europe. Police stations and bible study groups becoming shooting ranges. Our own government and AT&T telling lies. Wouldn’t you think folks who help big-$-fund Portfolio Managers realign their holdings would see a market decline coming? But they sure don’t behave like they believe it’s so. What’s the matter with them? Or is it with us? Rational Behavior under threats The normal actions of informed humans sensing impending danger is to erect defenses and plan strategies to deflect or overcome attacks. That is what market-makers [MMs] do in their ordinary course of moving a large part of a trillion dollars of equity investments each day from one set of hands to another. To get balance between buyers and sellers where volume transactions in stocks involve tens and hundreds of $-millions, the MMs usually have to put firm capital at risk temporarily. Hundreds of times a day, every day. They are no strangers to risks and threats. They are highly skilled practitioners of hedging and arbitrage. Those art forms are integral to their enviable successful progress in protecting their capital from harm. So what are they doing to protect against market declines? Nothing out of the ordinary. Just what they have been doing, day-in and day-out. That includes world-wide watching, listening, questioning, reporting, recording, evaluating, communicating. It’s strange that organizations so well resourced and disciplined would miss the threats that so many others claim to be about to harm all of us. Yet MMs continue to behave in the same manner, hedge to the same degree, pay for protection about the same amounts, in deals structured the same way as they have been, over many past months. We have been watching their behavior for decades They clearly behave quite rationally, rather systematically, given what they know at various times. In our recent SA article of “Worry, worry, worry” we demonstrated the differences present as they sense impending problems or ongoing good times. Our behavioral analysis of their hedging practices daily has not changed over decades. It shows the asymmetry of their price change expectations for 3,000 or more stocks day after day. For each stock we produce what they must think their serious, powerful clients are likely to do to the prices of stocks the clients want to own in the future, and to ones they no longer want to own. And to the price points where the clients might change their minds. The ranges of possible price prospects get described by a single simple measure, the Range Index. Its job is to tell the balance between upside price change potentials and downside price change exposures. Each stock, ETF, or equity market index has a Range Index [RI] whose number tells what percentage proportion of that subject’s likely coming price range lies below its current market quote. A low RI suggests limited downside, ample upside. So the RI becomes a common denominator for price expectations, a very useful yardstick to compare the expectations of many varied issues. And, in the aggregate, to have a sense of what the market outlook overall might be. That’s what is shown at various stages of market price change anticipations in the “Worry, worry, worry” article. Figure 1 updates that distribution of informed professional expectations to last night. Figure 1 (click to enlarge) (used with permission) The average Range Index of the 2,500+ names covered in this picture is 28, meaning that the typical stock has better than twice as much upside as downside. A 50 RI would make the odds of up vs. down a coin-flip. How many in Figure 1 have that kind of prospect, or worse (a higher RI than 50)? A negative RI means that the subject’s current price is lower than the bottom of the price range regarded as likely or justifiable. That condition sounds like “cheap” to many Graham & Dodd folks. Figure 2 tells what has happened to stock, ETF, and market index prices in the 16 weeks following the daily observation of Range Indexes for this population during the past 4-5 years. Some 2,959,450 observations built this display. Figure 2 (click to enlarge) That 1 : 1 blue row of Figure 2 is the overall population average, positioned at the 50 RI level. That’s where up and down price change prospects are held equally likely. The green rows above are of progressively lower Range Index (or cheaper) forecasts, and the red rows below the blue row are of progressively more expensive RIs. The maroon-count row just above the blue row is coincident with today’s population average. But we should be more interested in what can be done to improve an existing investment portfolio than in speculating about what might happen to the market as a whole. Play the game better What is of interest to active investment managers is the potential payoffs and odds for success in buys of those stock or ETF RI forecasts up in the top rows of the table. And what might best be purged from a portfolio where the holding’s RI is among those below the 50 blue-row level – higher RIs than 50. For perspective, take a look back at Figure 1. Today, just as in most daily experiences, there are many promising prospects for purchase off to the left in the Figure 1 distribution. To the extent that these have proven to be reliable, credible forecasts, then it is likely that what happens to the market as a whole has little impact on their near-term future. And it is their near-term future that active investors should be concerned with. In today’s global, high-tech, communicative and competitive networks of business activity, reaching out with forecasts as much as a year or more is not investing, it is just speculating. While overall-market forecasters are speculating as to where the averages will be a year or more from now, active investors will have the opportunity to have capitalized on interim opportunities, compounding their triumphs (often 3-4 times in a year) net of their mistakes (typically 1 in 2 years) to produce rates of gain that may be multiples of what the market averages may have produced in capital gains. Those kinds of odds, 6 out of 8, or 7 out of 8 wins in two years for each allocation of capital, are quite doable when good guidance is provided. Usually the rates of gain in the wins are well above those of the market, and the effect of compounding can multiply the progress in wealth-building well beyond the (now highly competitive and economical) transaction costs or infrequent loss. As an example, using market-maker forecasts to compare over 2,500 equities daily, and ranking them based on how well prior forecasts similar to the current-day forecast have performed, over 1900 opportunities have been identified so far in this 2015 year at a rate of 20 a day. Following a time-efficient discipline standard of portfolio management to all, of the closed out positions (more than half) the average annualized rate of net gains are +31%, compared to that of SPY at +5.1%. Conclusion There are nearly always attractive stocks or ETFs to buy, regardless of overall market prospect appearances. The diversity of opportunities among over 3,000 potential quality portfolio investment candidates provides a rich field of perpetually price-renewed prospects. But investors need to have a portfolio management strategy and discipline urging them to be frequently aware of developing opportunities and maturing prior actions in need of reinvesting. This is called active investing, and will involve more attention and time commitment than many investors are willing or need (the most fortunately capitalized) to make. The rewards for active investing are demonstrably far better than most investors of all types have been led to believe. Those investors faced with impending capital-requirements having fixed time deadlines may find that the only way now that will satisfy their needs makes adoption of active investing a most sensible practice. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Stocks Or Bonds?

I was writing to potential clients when I realized that I don’t have as much to write about my bond track record as I do my track record with stocks. I jotted down a note to formalize what I say about my bond portfolios. One person I was writing to asked some detailed questions, and I told him that the stock market was likely to return about 4.5%/year (not adjusted for inflation) over the next ten years. The model I use is the same one as this one used by pseudonymous Philosophical Economist . I don’t always agree with him, but he’s a bright guy, what can I say? That’s not a very high return – the historical average is around 9.5%. The market is in the 85th-90th percentiles of valuation, which is pretty high. That said, I am not taking any defensive action yet. Yet. But then it hit me. The yield on my bond portfolio is also around 4.5%. Now, it’s not a riskless bond portfolio, as you can tell from the yield. I’m no longer running the portfolio described in Fire and Ice . I sold the long Treasuries about 30 basis points ago. Right now, I am only running the credit-sensitive portion of the portfolio, with a bit of foreign bonds mixed in. Why am I doing this? I think it has a good balance of risks. Remember that there is no such thing as generic risk . There are many risks. At this point, this portfolio has a decent amount of credit risk, some foreign exchange risk, and is low in interest rate risk. The duration of the portfolio is less than 2, so I am not concerned about rising rates, should the FOMC ever do such a thing as raise rates. (Who knows! The economy might actually grow faster if they did that. Savers will eventually spend more.) But 10 years is a long time for a bond portfolio with a duration of less than 2 years. I’m clipping coupons in the short run, running credit risk while I don’t see any major credit risks on the horizon aside from weak sovereigns (think the PIIGS), student loans, and weak junk (ratings starting with a “C”). The risks on bank loans are possibly overdone here, even with weakened covenants. Aside from that, if we really do see a lot of credit risk crop up, stocks will get hit a lot harder than this portfolio. Dollar weakness and US inflation (should we see any) would also not be a risk. I’ve set a kind of a mental stop loss at losing 5% of portfolio value. Bad credit is the only significant factor that could harm the portfolio. If credit problems got that bad, it would be time to exit, because credit problems come in bundles, not dribs and drabs. I’m not doing it yet, but it is tempting to reposition some of my IRA assets presently in stocks into the bond strategy. I’m not sure I would lose that much in terms of profit potential, and it would increase the overall safety of the portfolio. I’ll keep you posted. That is, after I would tell my clients what I am doing and give them a chance to act, should they want to. Finally, do you have a different opinion? You can email me, or you can share it with all of the readers in the comments. Please do. Disclosure: None.