TOL - 13th Mar, 2024
Why is selling stocks so much harder than buying them?
In this episode of The Pitch, Medallion Financial's Michael Wayne provides a guide to know when to sell shares in a company.
It's a well-known phenomenon that it's far easier to buy stocks than it is to sell them.
It's all thanks to a little behavioural economics theory called loss aversion - which states that humans find it psychologically more difficult to lose money than to gain it. Because of this, we cling to poor-performing positions - or sometimes double down on them - hoping they could one day bounce back. Or, we stick our heads in the sand and ignore the new reality of these stocks completely.
But Medallion Financial's Michael Wayne believes investors should recognise their biases and cut their losers early.
"If you have 10 stocks, and nine stocks are up 10%, but you have one stock down 90%, that's going to undo all the good work that you've done across the other stocks in your portfolio. Even if that business doesn't fall 90%, or it falls 50%, it still undoes a lot of the good work," he explains.
"So, our approach when looking to sell out of companies is, if the news flow changes or the updates from the company start to deteriorate, we will then look to exit the position and avoid that small loss turning into a big catastrophe."
In this wire, Wayne provides a beginner's guide to selling stocks, shares why investors should let their winners run, and outlines one stock the team has recently sold out of and why.
Note: This interview was recorded on Wednesday 21 February 2024. You can watch the video or read an edited transcript below.
Edited Transcript
Ally Selby: Hello and welcome to Livewire's newest show, The Pitch. I'm Ally Selby, and I don't know about you, but I really struggle to know when to sell my shares. So today, we're going to learn how to do exactly that with the help of Michael Wayne from Medallion Financial. Thank you so much for joining us today, Michael.
Michael Wayne: Not a problem. Good to be here. Hopefully, I can be of some use.
Ally Selby: Definitely. They do say that it's harder to sell shares than it is to buy them. I can definitely vouch for that. Why is that?Michael Wayne: So it comes down to behavioural economics, in many ways. Many people suffer from a behavioural bias whereby they will do anything to avoid a loss. So loss aversion is a key thing that many people have. The reality is people will hold onto something, they'll will and hope it to come back over time, even though the news flow and the outlook for that company has changed. That's a key thing.
A second thing is familiarity bias. People feel comfortable holding things that they might've held for years. They might've had a good experience with that business in the past whereby they had made a profit or they had seen that company grow, but then they become oblivious to the changing landscape ahead for that company. So a lot of people are impacted by bias. They become unhinged from the facts out there and the changing landscape, and they choose to hold on to things and hope that in time, things will come back.
Michael Wayne: So as an investment team, our preference is to let the winners run within our portfolio and get rid of the losers early. So if you think about it from an example, if you have 10 stocks, and nine stocks are up 10%, but you have one stock down 90%, that's going to undo all the good work that you've done across the other stocks in your portfolio. Even if that business doesn't fall 90%, or it falls 50%, it still undoes a lot of the good work. So our approach when looking to sell out of companies is if the news flow changes or the updates from the company start to deteriorate, we will then look to exit the position and avoid that small loss turning into a big catastrophe.
Ally Selby: It sounds like momentum, letting your winners run. Is there any historical data that backs why that is a better approach to follow?
Michael Wayne: Well, there's momentum in the sense of the share prices, but then there's also momentum in the underlying balance sheet. Often you hear a lot of investors or fund managers talking about how earnings growth, revenue growth, and dividend per share growth lead to positive outcomes for share prices. The inverse is true as well. If you start to see a lot of those key metrics deteriorate over time, often you'll see the share price come under pressure as well. So momentum not only in the share price but also in the underlying business and the balance sheet can be a leading indicator, if you like.
Ally Selby: Where have you seen negative momentum in recent times? Are there any positions in the portfolio where you've had to cut those positions? Maybe you can take us through them as an example.Michael Wayne: So one of the companies that we've recently exited entirely is IDP Education (ASX: IEL). It's a business that we have held for a long period and done quite well off. However, the landscape for that business has altered somewhat over the last 6-12 months. There's been regulatory changes in the UK and Canada, for instance. There are also some ongoing issues in India with their English language testing systems.
So from our standpoint, the visibility or the look-through for this company has become more clouded. It's still a company that we like. We still think their student placement businesses have the potential to generate a lot of growth for them. However, at the moment, we just feel as though the momentum in the news flow is quite negative and it's very difficult to get a gauge as to where things will eventually land for this company, particularly with their English language testing system part of the business.
So you overlay that with a declining share price that's fallen through some long-term resistance levels, for us, we just figured that we'd put that one to one side and maybe look at re-entering at some point down the track if that news flow starts to improve again and the outlook for certain parts of their business continues to build momentum.
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The Medallion Australian Equities Growth Fund provides investors with a high-conviction portfolio of top-tier ASX stocks. Blending meticulous bottom-up research with a style and sector-agnostic approach, Medallion hunts for high-quality businesses in their early stages of growth.
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Ally Selby is the deputy managing editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian Group, Your Money, Sky Business and Sky News.
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Ally Selby is the deputy managing editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian...
Expertise
Ally Selby is the deputy managing editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian...
Expertise
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