getting better at selling - aaii silicon valley...
TRANSCRIPT
GETTING BETTERAT SELLING
Silicon Valley Chapter of AAIISeptember 10, 2011
Don CassidyPresident, Retirement Investing Institute
Don @ R-i-I .org
DISCLAIMERNeither the speaker nor the Retirement Investing Institute provides individualized investment advice. Neither is licensed as a Registered Investment Advisor. No investment products are offered for sale. Any individual securities (including stocks, mutual funds, or ETFs) mentioned are strictly examples and do not imply investment or trading recommendations. Investors should do their own homework before selling or buying any security.
WHY DO WE BUY STOCKS?• We Buy to SELL !!
• Think Like a Shop-Keeper
• Don’t Think Like a Collector !
• … But it’s Difficult: 180-degree reversal !
How the Market Spends TimeSince 1885, the U.S. stock market
has spent
* 32% of the time in BEAR Markets* 44% RECOVERING from those bears* 24% in new high ground
Source: Abacus Financial Planning,Cleveland. Info as of mid-2010.
“THE NEW NORMAL”• Implies the old normal
is outdated
• Implies a thorough portfolio re-exam
• Strongly implies we must be able to sell dispassionately !
ROAD MAP• Understanding Ourselves
and Surroundings
• Naming & Battling the Barriers to Action
• Viewing the Market in Crowd Terms• Becoming Contrarians
• Listing Some Good-Selling Rules
SUBTLE CONDITIONING( TO DO NOTHING )
Watching TV and Reading Newspapers
Baseball ScoresWeather Reports
Political NewsCrime News
z-z-z-zand …
Market Results
PROBLEM, and STAKES• Thomas Friedman in The World is Flat:• p21. “Change is hard. Change is hardest on
those caught by surprise. Change is hardest on those who also have difficulty changing.But change is natural; change is not new.”
• p378. “The weak will fall further behind faster. The traditional will feel the force of change more profoundly. The new will get turned into old quicker.”
CRITICALITY OF SELLING WELL
“If you avoid the big down cycle, you don’t have to hit it out of the park on the way up.”
-money manager Pat Adams, PVG Asset Management
(which means taking less risk to hit home runs to catch up!)
INVESTING IS LIKE COACHING
• Don’t Go Into the Game Unprepared!
• Watch Game Films for Opponent’s Tendencies
• Focus on Correcting Our Own Weaknesses
• ANALYZE BEFORE STEPPING ONTO THE FIELD !• OUR NEED IS MOST ACUTE re SELLING
WAYS TO BE ONLY HALF PREPARED
1. Think 100% Fundamentals and Ignore Technical Analysis & Psychology
2. Focus Attention on What to BUY, withNo Special Attention on Selling Skillsquestion: where’s your greatest exposure?
3. View “HOLD” as a Default (it SHOULD be a DECISION!).
“Hey, great! I can’t wait to see how my Enron, AIG, & GM stocks are doing.”
PEOPLE HAVE AN AWFUL TIME LETTING GO
GM: what does it take to make some people sell ??
(BigCharts.com chart thru day before filing Ch.-11)
Selling’s Pain MeterHIGH
Sell @ Loss Finality Ends HopeProves Us a “Failure”Quantifies Official Loss Verdict
Hold @ Loss Retains Hope; Delays Pain; Shields Ego
Sell @ Gain “Realization Utility” – Prof. Barberis @ YaleProves Brilliance – BUT Pay Taxes!
Hold @ Gain Endowment Effect; Strokes Ego;Keeps an Known Friend Close at HandPostpones Taxes; “I’m a Good L-T Investor”
LOW
MAJOR FOCUSES FOR SELLING
• NOT primarily fundamentals– But don’t ignore them!
• Heavy emphasis on psychology– The crowd’s, and our own as well !
• Watch for extreme moves in price– these ARE unsustainable
• Be careful of “religion stocks” ! • Volume extremes = useful immediate signal • Selling IS a reversible decision !!
SELLING INHIBITORS• Media / Academic Propaganda• Lifetime-Decision Mindset• Endowment Effect• Reinforcement; Cognitive Dissonance• Requires Reversal of ‘Invested’ Position• Giving Up Hope for Better; Perfectionism• Avoiding Closure; Underperformance
when under stress• Implies New Stressful Decision• Taking a Loss Injures our Precious Ego
THE FOLLY (!) OF “BUY & HOLD”
• SOUNDS prudent–Good marketing device
• Sucks you in–But they earn a living by
having you NOT hold !• Makes you overly forgiving• Makes you PASSIVE !• WORKS … IF MARKETS GO
IN ONLY ONE DIRECTION !
PLEASE DO NOTINHALE
• Efficient-Market Hypothesis– The irony of B-schools
• Random Walk
• ‘Expenses & Taxes are #1 Issue’– This assumes the above !
>>Ask them, “Buy & hold WHAT??”
WHICH IS MOST VARIABLE ?
PriceValue
TaxesComm’s & Expenses
>> Media, Academics Mis-focus the Public !
ERROR OF FOCUSING ON TAXES AND EXPENSES…
• Implicit Assumption = Randomness and Helplessness
• Therefore ALL Analytical Tools are Useless( NOT !!)
• If YOU Believe THAT, no need for effort.• No need for AAII !• Give up, index; go fishing!
LAWS OF MARKET GRAVITY
What Goes Up Probably Comes Down !“In the long run, stocks will fluctuate.”
What Went Up MOST and MOST RECENTLY will come down the hardest !
What’s Gone Up May Not DESERVE to Stay Up.
HOPE IS NOT A USEFUL INVESTMENT (or trading)
STRATEGY !!
• Hope is designed to shield the ego
• It often damages wealth in the process
• At best, hope prevents consideringpotentially better opportunities
KEY MIND-SETS• Think in Terms of CROWDS’ behavior• Avoid Joining any Large, Noisy Crowd
• Be Especially Mindful of Recent Reinforcement – Runs– Sharpness of Trend– Media Drum-beat
IMPORTANT IMPLICATION…
Successful investing ALWAYS requires doing what feels UNCOMFORTABLE at the time.
BECAUSE…Certainty comes late and so is usually 100% wrong!
UNLOAD THE BAGGAGE !Many decisions HAVE major costs
for making errors… wrong college, wrong mate, wrong house, wrong car, wrong job
Investing (and trading) has LOW $$ costs forescaping – but heavy emotional baggage/cost
Our egos get involved because keeping score is a frequent ritual with investments.
NEED TO KNOW WHAT ‘MARKET TIME’ IT IS
• 3 Phases:– Denial (disbelief)– Migration– Panic (capitulation)
Todd Harrison, www. Minyanville. com
NEVER Wait for Brokers !
• Their ‘Buy Bias’• Training is in Product Pushing• Most CANNOT Use the S Word• If / When They Ever DO, it is WAY Late!• Know the Code Words
And ESPECIALLY IGNORE BUY ADVICE ON FINANCIAL-TALK RADIO & TV !
NOTE AND USE PUBLICLY AVAILABLE INPUTS
TO KNOW IF TIME TO SELL• Personal Diffusion Index• Counting the chips• Having too much fun??• Conversations/parties (celebration)• Market headlines on non-business pages• ICI mutual-funds’ flows data (ICI.org)• Cartoons, movies; TV humor and ads (!)• The VIX Index
New Yorker Cartoon Count
Bullish Percent and Total Number
1995: 100% (1)1996: 63% (8)1997: 50% (14)1998: 46% (13)1999: 70% (33)
New Yorker Cartoon Count, cont’d.
Bullish Percent and Total Number
1997: 50% (14)1998: 46% (13)1999: 70% (33)2002: 0% (25)2003: 0% (7)
Crowd Screaming Loudly? Give It What It’s Demanding
• Stocks? Give it some of yours !• (Cash? Give it some of yours !)
HIGHER PRICES REQUIRE NEW BUYERS
So… When thinking H vs. S, figure out who the new buyers
might be, and what their motivation would be.
“TIMING THE MARKET” ??
• TIMING = attempting to ANTICIPATE market or individual-stock up or down moves
• PRICING or HARVESTING = taking advantage of unusual recent moves that appear potentially unsustainable.
• (Farmers do!)
RULE OF 3-4-5-6
Markets are overextended, based on historical odds, after rising consecutively for
3 years4 months
5 weeks6 days
“In Just Another …”
HOPE IS NOT A USEFUL STRATEGY !
AN IMPORTANT SELF-TEST:Are you TRULY able to
Sell as readily as you Buy ?( Keep working at it ! )
NOTHING IS FOREVER• Don’t Need to Agonize/Obsess re Buys
– This is NOT a marriage or career choice !
• Act on Themes• Keep Themes Constantly Under Review• Get Your Ego Out of the Way!• Set Stops (but NOT at IBD’s 8%)• Set Sell Targets When You Buy; Try NOT to Raise!• When Bad Things Happen, Recovery May Never Occur (!)
(GM, WaMu, Enron, Beth Steel, ETC ETC !)
BIG-PICTURE SELLING RULES(sorry, no mathematical formulas!)
• Sell when you’re having lots of fun• Sell when tempted to count the chips
• Sell when market is on an extended run (up)
• Use ‘Rule of 110’ to make yourself sell high
• Sell when S&P 500 ~ 20% above its 200-day M A
BIG-PICTURE SELLING RULES
• Sell when VIX index is @ lowest in several months
• Sell when stock funds’ net inflows (www. ici. org )have been strong (NOT a current problem!)
• Sell 60-90 minutes after gap-up openings
• Sell when fund managers are quoted in capitulation
• Sell when market doesn’t rally ongood news (buyers’ powder is all spent!)
• Sell when any news surprises are most likely not favorable (‘Goldilocks market’)
AFTERMATH OF UP-GAPa.k.a. bullish volume spike
• Everyone already KNOWS the Good News• Who is Left to Take Out the Late Buyers??
AFTERMATH OF DOWN-GAP(Think “lazy L”)
* * .
• Humans’ Memories of Pain are Sticky• Fear is Stronger than Greed
SINGLE-STOCK ( & ETF ) RULES• Sell when you fall in love with a stock
• Sell when you feel really smart (have all winners?)
• Sell when stock is on a multiple-day run
• Sell on volume crescendos• Sell on volume spikes
• Sell on engulfing-reversal days after a rise
• BULLETIN: YOU CAN BUY BACK AGAIN !
SINGLE-STOCK ( & ETF) RULES
• Sell 60-90 minutes after gap-up openings• Sell on good earnings news (!)
• Sell when stock is far above its 20-day moving average (each stock is different!)
• Sell when stock doesn’t rally on good news• Sell when EITHER the fundamentals OR
technical analysis speaks caution• Sell if others in industry have rolled over
THE ACID-TEST QUESTIONWOULD
YOUBUY
ITTODAYTODAY ?
No?: You’re Playing ‘Greater Fool’
! Holding IS Buying !
WINNINGTHE GAME
• Often Means NOT Making Killer Mistakes
• Remember the 3 Market Phases– Denial /Disbelief– Migration– Panic
• Don’t Join the Crowd !
• OBEY the Rule of 110
SELLING IS NOT 100% ABOUT…• Fundamentals
– P/E ratios, yields, PEG, Price/Sales• Whether You Have a Gain or a Loss• Avoiding taxes• Avoiding Commissions• Keeping Your Turnover Ratio Low• Loyalty (stocks have no feelings!)• Irreversible Life Choices
• SELLING IS ABOUT LOCKING IN GAINS !!
SUGGESTED READING
• Blue Ocean Strategies Kim & Mauborgne• The World is Flat T. Friedman• Inside the Investor’s Brain R. Peterson• More than You Know M. Mauboussin• The Paradox of Choice B. Schwartz• The WSJ Guide to the End of
Wall Street as We Know It D. Kansas• Active Value Investing V. Katsenelson• When to Sell J & R Mamis• The Brainwashing of the S. Selengut
American Investor
• It’s When You Sell that Counts! D. Cassidy• Trading on Volume D. Cassidy
MORE GOOD READING…
www. R-i-i. orgClick on ‘Good Books’
ClassicsMarket HistoryTechnical AnalysisMarket PsychologySelling & Contrary OpinionBond & Income InvestingOther Topics
Thanks for Taking Your Time to Think With Me !
Don Cassidy
“It’s When You SELL That Counts !”(Global Publishing)
Don @ R-i-i. org
If you Value AAII…Why not invite a friend or
family member next time?
Help your chapter GROWso we can serve more investors!