Selling Is the Secret—Not Buying

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Al Thomas, author of the well known book “If It Doesn’t Go Up, Don’t Buy It,” wrote another interesting article this past weekend. Take a look:

Every year in the last issue of Forbes, Fortune, Money, Kiplinger and countless other publications the magazine mavens predict the best performers for the coming year.

It is almost a given they are always wrong.

During raging bull markets they don’t look so bad, but in sideways and bear markets they should have stayed in bed. This year’s bear had them hiding under their desks.

Fortune in the December 2007 issue had 100 no-load, low-expense ratio mutual funds. Of the 100 their pick for the best 6 were Artisan International (ARTIX), BlackRock Enhanced Income (BRISX), CGM Focus (CGMFX), FBR Small Cap (FBRVX), (Manning and Napier World Opportunities (EXWAX) and Oakmark Select (OAKLX).

These were the crème de la crème yet only the bond fund, BRISX (-14%) outperformed the Standard and Poor’s 500 Index that declined 36%. The experts picked those that were down from 40% to 51%.

Do not allow your broker or financial planner to come up with the sick story that your account beat the S&P; by a few points. He might think that is good, but you lost money. He had no plan to protect your savings.

Many people were down 50%. Don’t they realize the account must make 100% just to get back to even? If any broker allows a customer to lose this amount do you think he is smart enough to make 100% to get back to “even”? Las Vegas will take that bet any time.

Brokers and money managers are not taught money management. As a former brokerage company owner I can attest to knowing few brokers who know how to sell. This is especially true for mutual fund managers. Unfortunately many mutual fund charters require 90% of customers money to be invested at all times. There are many times when the market is going down there not only should be no buying, but the fund manager should be in cash. The customer will not be making money, but more importantly he will not be losing money.

The secret of stock market success is not buying – it is selling. Wall Street does not teach brokers to sell. Any investor who had a mutual fund this past year will corroborate that statement.

Any fool can be a smart (?) broker during a bull market. Few brokers know how to handle customer money during a bear market. It seems the worst of the bear is over, at least temporarily. Those who held their positions this long should probably stay in during this next run up. A broker with a strong technical background should be able to see the next top and have his clients run for cash.

It is extremely doubtful we will see DOW 14,000 again in our lifetime. This cyclical bull move will give an investor a chance to get back about 50% of what has been lost, if that.

[Emphasis added]

The emails keep coming in from investors who have lost (some with their financial planner’s help) 50% of their portfolio value last year. Some report that they have now given back all the gains ever made plus some of their principal.

After the 2008 debacle, it should have become obvious to the investing public that the art of selling in a timely manner is far more important than buying. I will take this thought one step further by saying that even if you make only mediocre returns during a bull market, as long as you don’t participate in bear markets (vial a sell stop discipline), you will come out ahead.

Here’s a simple example. Let’s say, you were right on with your fund/ETF selections and were able to compound your total portfolio at an annual rate of 10% for 7 years straight. That means your $100k initial portfolio value went to $200k. Like a real trooper, you held on to everything you bought through 2008 and subsequently lost 50% of your portfolio. You now have given back everything you made over the past 7 years and are now faced with a lengthy uphill battle of trying to recover your losses.

Given these facts, it’s obvious that you could have kept your money in the bank at 2%, and you’d be in better shape. From my viewpoint, selling has always been more important than buying. Unfortunately, many investors had to learn this simple fact the hard way.

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