Saturday, 5 July 2014

The 'Reverse Bubble' (Portfolio Sale)

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One of our human investing behavioural biases is the fear that a paper gain we have made on an investment will suddenly be snatched away. This bias leads us to sell winners 'too soon'. Of course, the difficulty is identifying 'too soon' - I haven't yet found anyone putting forward a coherent strategy for when to sell, other than 'not too soon'.

My own observation is that the high-yield securities I aim to buy tend to behave a little differently to the run-of-the-mill 'value' shares. Not all high-yield is 'value', of course - the skill lies in sorting out the fatally flawed from the temporarily disabled. A high yield opportunity often exists primarily because of a perception of risk that is subsequently proved to be overly pessimistic. In other words, it is like a 'reverse bubble': once it pops, the price returns to 'normal' levels.

This thinking led me to impose a 'sell' discipline on myself - waiting until the capital gain (due to a price rise) had reached five times the current (or forecast) income. I can't prove that this particular threshold is optimal, it just seems to work for me.

More often than not this rule helps me control my urge to sell - but the rule has its own challenges. My most recent sale is an example. I bought Standard Life Investments Property Income Trust (LSE:SLI) just over a year ago, when it floated to the top of the yield charts on what seemed to be a number of concerns, including a slim dividend cover figure. I felt quite wary about it and decided it was 'one to watch', for all the wrong reasons.

If you look at the price chart, it resembles one of the rides at my local Chessington World of Adventures: up then down then up again. This rollercoaster price trend approached my 'sell' threshold step-by-step, rising then falling. But, like a real-life rollercoaster, you just want it to end.

Now, I'm not a great fan of analysing price charts - I think it's a bit like burnt toast and tea leaves (remember them): people can see pictures of whatever they want. But I do take notice of a secular price trend - and the SLI share price seems to have reached the top of the ride.

So all these features, the slim dividend cover, the price trend and lack of specific good news gave me an excuse to exit slightly earlier than my 'sell' rule would allow (i.e. 4.3 versus 5). I finally capitulated - and netted a 34%  profit.

I could well be wrong and be leaving a lot of (potential) cash on the table - but I feel faintly virtuous that I have lasted this long. And my bubble of tension has been deflated.

[Sale price: £15.25] 


I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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