Knowing when to sellThis comment is my response to parcheg's astute observation about my investment and then divestment of LBS. Hopefully the example will provide some insight into to my process of trying to figure out when to sell, which is the most difficult part of investing for me.
In hindsight, I wish I had stayed invested in LBS as the 13% yield is hard to ignore. The thing about hindsight is that it is 20-20 and you have to make investment decisions based upon the best information that you have at the time.
The market has scared the crapp out of me since JPow decided to eliminate the buying power of investors by jacking up interest rates in order to eliminate inflation.
I hate selling as FOMO is a powerful drug. However, it is something I have had to learn to do. I have picked up some pretty ugly scars over the years from falling in love with a position and averaging down nstead of exiting when things stopped making sense. The hardest part is recognizing the signs that things no longer make sense for any given investment.
I typically hold no more 3 stock positions at one time. Sometimes I will hold small trading positions in a couple of other stox but that is more for sport than for investing.
I put a lot of time and effort into a stock before I make it a core position. Usually, I start out with a small position that intrigues me which I add to over time if the investment ticks my investment boxes. By the time one of my investments becomes a core position, I'm typically deep down the rabbit hole into the story. That makes selling a core position really difficult for me
The biggest obstacle to me selling a stock when the share price starts moving down has always been my ego. I always wanted to be right and obviously "the market must be wrong". The cost of trying to prove you are right can really add up when it comes to the market, just like in real life.
I have been fortunate in recent years to have found my version of a stock market "shrink" via SH. Who woulda thunk it? The ability to converse with and share ideas with someone that you respect and trust goes a long way and I urge anyone reading this to consider the possibility. Maybe I just got lucky. The best part is that this investor and I have become friends over time.
Back to my decision to sell LBS. While most investors limit their perspective to the huge payouts offered by split funds, the good news and bad news about split funds is that they are highly leveraged. For example a 10% move up or down in the underlying securities held by LBS will move the share price of LBS by about 25%. If you look back in time, LBS dips really hard when the market tanks which makes sense because of the leverage.
With JPow repeatedly saying that the FED doesn't want to hurt investors, but it will do what it has to do, I took that as a flashing neon sign to exit LBS, because the FED always ends up getting what it wants.
The market is bouncing along pretending that inflation has been licked, but it hasn't. JPow has warned a couple of times that the FED has been fooled in the past into thinking inflation has been beaten and it prematurely took its foot off the brake. If JPow puts on his face in four weeks, the market could easily tank. There are too many market influencers (Goldman and JPM immediately spring to mind) that are predicting a significant market correction in Q2 for investors to ignore.
Maybe the market will skate through without the need for a defibrillator, but if it doesn't, a holding like LBS will likely get kicked in the teeth because of the leverage. That is why I sold LBS and why I'm sitting on plenty of dry powder, waiting (and hoping) for another market scare next month created by a hawkish JPow at the next FOMC meeting.
If the market decides to take a quick 20% drop, which it is prone to do when fear kicks in (check out the 19% drop in the Dow in December 2018 on the "threat" of rate hikes that never happened). LBS shares dropped 30% (from $9.55 on Aug1 2018 to $6.68 on Dec 2018) on just two .25 point rate increases.
JPow set the table for creating fear in the market last summer so I hit the sidelines. So far, my decision looks bad or at least poorly timed as LBS has paid out every month. I take consolation in the fact that I'm sitting on a lot of powder that is paying me 4.05% while I wait that I can liquidate without penalty in a day. If I was faced with the decision to sell LBS to raise money again, I would make the same decsion.
I guess my message is that we each know when things stop making sense. The trick is to listen to your instincts which can be triggered from anything instead of holding on and hoping. If I have learned anything from the market, it is that you can always get back in.
My apology for the long post and to those that don't give a **** about my thinking or strategy. For those that have made it this far, I hope my comments have given you something to think about. One thing I know for sure, is that the market humbles us all which makes selling easier for me.