Monday 9 March 2015

Sell Your Winners! (Portfolio Sale)

(Andy Rainford/iStockphoto)
Now, what does this button do..?

I've just sold a holding in my DIY Income Investor portfolio and realised a 29% capital gain over less than one year - enough to pay for a family summer holiday. 'Not bad' you might say - but was I 'right' to sell?

The typical advice given to new investors is 'hold your winners and sell your losers'; but presumably that can't be the whole story (or you would never realise your capital gains). I'm afraid that my own approach does not really follow this advice - although it doesn't ignore it completely.

The basis for this advice is actually quite subtle, because it is based on our innate behavioural biases (or our 'monkey brain', as I call it). Academic research shows that - sure enough - we do tend to sell our winners too early and sell our losers too late: it is called the disposition effect and seems to be caused by an aversion to loss realisation. One observed manifestation is that gamblers who are losing tend to take greater risks than they would normally.

Human beings are a bundle of behavioural biases, which over hundreds of generations have helped our ancestors to survive. These biases are quite powerful, mainly because they are subconscious. Even when we are aware of them, is it actually quite uncomfortable to resist them.

So, over the last few years, I have developed a couple of simple investing rules to help me deal with my biases:

  • Rule 1: Buy only securities that provide an attractive, sustainable income yield
Rationale: If a security is giving me a good income, I am less concerned with the day-to-day fluctuations in its capital value on the market.

  • Rule 2: If it is a 'winner', delay selling until the capital gain is more than five times the current/forecast annual income
 Rationale: This provides some support to the discipline to 'not sell too soon'. Case in point: today's sale (see below)

  • Rule 3: If it is a 'loser',  delay selling until the capital loss is more than ten times the current/forecast annual income
Rationale: The price of many 'losers' does often recover over time, given some flexibility. For example, my holding of RSA 'bombed' when it had difficulties and the dividend was cut; I'm still showing a loss but the yield has recovered somewhat. And yes, this rule is not symmetrical with the 'winner' sell rule.

  • Rule 4: If it is a 'winner' or a 'loser', sell if the yield is no longer attractive
Rationale: 'Yield' is a proxy for 'opportunity cost' - your capital could be working harder elsewhere.

  • Rule 5: Use your judgement in the interpretation of the 'rules'
Rationale: Sometimes there are unusual circumstances. For example, my APF (Anglo Pacific Group) holding - my second biggest investment - is down 50% overall (!); the yield is sky-high, but this isn't necessarily a good thing, as it indicates that the market is scared. However, I'm taking a contrarian stance and hoping for an eventual recovery in the price of (ultimately finite) raw materials.

Today's sale

After that brief digression, here are the details of today's sale. It is my last remaining tranche of Tullett Prebon (TLPR), a 'financial intermediary' which has sparked back into life in the last week or so (if I had more interest I would try to find out why...). I have been in and out of TLPR over the last couple of years, making a nice return on my efforts. The price rise hit my '5 times annual earnings' rule and I have sold. With an unexciting yield of 4.5% - in a tricky market - it is likely to be off my radar for a while.

Now, which ETF looks interesting...?

[Sale price £3.71]

PS As I write this, there is sustained interest in the market to TLPR. Have I sold too soon? (And the monkey brain kicks in again...)

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.


  1. I admire your analysis and your rationality - how do you manage your own psychology? I only own index funds so I've never had to grapple with the thought that I might have bought or sold too early or too late, or made some other mistake somehow. It's impressive to me that you seem like you can stay rational and accept that occasionally you'll make mistakes.

  2. How have your ETFs done? IAPD and EMDV have not been great capital- wise for me (though the former is respectable enough). VHYL and EUDV much better. But maybe I just got lucky with the timing of the purchase for them. (All were bought in the last 1-2 years). I seem to be able to judge entry points for shares much better!

    1. Good question. I am using ETFs as the 'workhorses' of the portfolio, with individual shares/bonds as the 'racehorses': highly-strung but potentially winning races.

      Yes, ETFs are much harder to judge - because they are an amalgam of many individual securities. I tend to buy on their yield, but this can be misleading with currency fluctuations. Mainly I try to split between dividends and fixed-income, with a further split between geographical areas.

  3. I sold TLPR last week (using your rule of thumb) - only your post has alerted me to the fact it was possibly too early. I try to never to look back - it was a good deal.

    I suspect that we will get a whole bunch of selling in the next couple of weeks as the new pension rules (and publicity) stir the normally inactive SIPP owners into generating cash for tax free lump sums and Lamborghinis - anything there with your 5 x Annual in capital gain - sell it today!


    1. Yes - looking back does not do any good. And you made a nice profit!

      What did you buy?

    2. UNITED UTILITIES - boring - but hey - they might get bought.

  4. I've always thought "sell losers and hold winners" was a bit strange. I guess that comes with being a value investor.

    If I buy something and it goes down then, assuming the fundamentals are still there, why would I sell? It's even cheaper now so if anything the rational thing is to buy more (although I tend not to do that either). On the flip side, if something goes up faster than its fundamentals then it's no longer such good value and should, if anything, be sold.

    Anyway, I like your rules-based approach and the fact that you give yourself some discretion over them too, rather than just being a slave to your own system.

    As for Tullett Prebon, it went up (along with the very similar ICAP) mostly, I think, because volatility returned to the markets, and that's what drives profit for these inter-dealer brokers. I sold ICAP recently and still hold Tullett, although like you I may not hold it for much longer if the price keeps going up.

    Thanks for listing your rules though; very interesting.