Hold or Fold?
Hold or Fold?
The decision to sell is just as important as the decision to buy, but often less straightforward and more emotional
In investing, the art of buying undervalued, contrarian investments is very important and where most people focus their attention. However, just as important as the purchase decision is the DECISION TO SELL. After all, the gains (or losses) are not realized until you print them with the sell order!
In general there are 4 main occasions that have led me to sell a stock position:
My original thesis has played out successfully or proven wrong.
New considerations have emerged which stack the odds against me.
Stock position has grown so large that it introduces too much idiosyncratic risk to my portfolio.
Stock position has grown so small that it’s not worth continuing to monitor and I do not have conviction to double down.
Let me use a couple case examples from my own investing journey to illustrate these points:
Selling Container Ship Stocks
Back in late 2020 and 2021, container ship stocks like ZIM, DAC, GSL, etc. were soaring as port congestion constricted shipping supply at the same time that shipping demand spiked as consumers “revenge spent” their COVID stimulus checks on all kinds of items that needed shipping such as furniture, electronics, clothes, etc.
But, the situation would be short lived as the temporary demand spike receded once consumers made their one-time “stimmy” purchases, and port congestions slowly resolved. I had a significant position in ZIM and at one point was up over 100% (see my brief writeup on ZIM from 2021 here).
But instead of selling at the top by recognizing the temporary nature of these tailwinds, I held on out of greed and ended up selling for break even. I did not abide by one of my favorite quotes from economist John Maynard Keynes, which states “When the facts I change my mind.”
“When the facts change I change my mind. What do you do sir/madam?”
-John Maynard Keynes-
Today, the situation looks even more bleak as many containership orders were placed at shipyards during the recent boom, and these ships will now start being delivered starting in 2023 and over the next few years (see article link below). This will continue to add to container ship supply and depress rates, likely leading to a multi-year bear cycle for container ships. Stocks like ZIM looks very cheap based on trailing earnings multiples, but it seems like a value trap to me and I’ll be staying away from the sector for now.
Avoiding (or shorting) Tesla
In retrospect it was obvious. Every car company and their mother were announcing the launch of new electric vehicles (EV’s) back in 2021 as Tesla stock soared to all-time highs. I don’t know why anyone in their right minds would continue holding onto TSLA stock, especially if they had generated life-changing returns by investing early on. But greed is a powerful emotion as is confirmation bias.
We know how it has played out - Tesla is down more than 60% from all-time highs, and is slowly losing share in the increasingly competitive EV market. Worse, auto manufacturers including Tesla are starting to engage in price wars on their EV’s. Last month Tesla cut prices on many of its models, followed by Ford cutting prices on its Mustang Mach-E. It is highly likely that other OEM’s will also start to discount their electric vehicles to compete which could easily turn into a bloodbath for profit margins in the sector.
Of course unpredictable events like gamma squeezes and meme stock rallies might bail out Elon Musk, but I’m happy to stay on the sidelines until the dust settles. I did buy a couple put options on Tesla back in 2022, but “paper handed” it and sold for only a small gain instead of the multi-bagger it could have been. It takes a lot of guts to be a successful short seller!
Paring Oil & Gas Stocks
Oil & gas stocks have enjoyed a monster run from 2020 lows and have done most of the heavy lifting in my journey to financial independence. So have I sold to print the gains? Yes and no.
On the one hand, my thesis that there will be insufficient supply to meet growing demand has yet to fully play out, meaning that there will likely be further upside for the oil & gas stocks. On the other hand, the increase in both the commodity and the underlying stock prices mean that the odds have shifted somewhat less favorably than in 2020 when it was a no brainer.
Additionally, the oil & gas stocks have become too large of a position in my overall portfolio to feel comfortable. As a result, I have pared down some of my holdings to diversify into some other sectors I believe will do well in 2023 and beyond which I wrote about here.
TL;DR: The decision to sell is not an easy one, with a lot of complexities and emotions involved. By leveraging the frameworks & real-life examples I have provided, hopefully you can make a more informed decision.
Housekeeping Notes:
I realized it’s a bit cumbersome to communicate with the author on Substack so you can always email me at Hiddenrockcapital@gmail.com with any questions or comments (in addition to posting comments directly to the posts)
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