Everybody tells you when to buy, but nobody tells you when to sell.
Yeah, it's a blanket statement, but despite the sharp fall in stocks over the last year and a half, and the hard-to-figure rally over the past two months, it remains true almost all of the time. People talk about how analysts are issuing more sell ratings on stocks these days, and indeed they are. Still, sells make up just 1.6% of stock ratings, according to Thomson Financial/First Call.
And let's not just pick on the analysts. Just about all the investment advice available to investors (particularly individual investors) is geared toward what stocks to put chips down on -- with nary a word about when the time has come to take profits. In its look ahead at 2002, don't expect
to pen the article "Ten Tech Stocks to Lose Your Shirt On."
won't suggest that after seeing
stock climb more than 90% this year, maybe you should lighten up a little. Oh, and sell that
your uncle left you already.
Of course, everyone has vested interests in seeing stocks go up, as we'll discuss. But despite recent efforts to increase disclosure and reduce securities-industry conflicts of interest, the overwhelming message to the average investor remains buy, buy, buy. And if stocks start falling again, that's going to mean lots of people bidding their money bye, bye, bye.
As with the analysts, saying buy makes good business sense for the media. We all get a thrill when we buy things, of course -- Santa Clara finance professor Meir Statman says that with all the expectations we have for our new purchase, it's like a baby being born -- but selling is loaded with negative connotations. Such a dour attitude surely doesn't sell magazines.
Moreover, when you recommend that people buy a stock, the world is your clientele. When you recommend trimming positions, you're speaking only to the tribe that already owns. Good business for the Wall Street firm and the magazine isn't always going to coincide with good advice for the investor.
A shame, because now there are plenty of people who probably need to be told they should let their babies go. Stocks have come a long way in the last couple of months, and while it is a matter of debate whether the broad move in the market makes sense, doubtless the moves some stocks have put on do not. About a 10th of the stocks in the
are up 40% or more since Sept. 27. One suspects some of those rallies may be gifts.
A good stockbroker can help. He or she will go against their lesser nature, which is to scream at clients to not even bring up the idea of dumping a position (particularly if the stock has been a big loser, particularly if buying it was the broker's idea), call the client and say it's time to sell. Or rather, because we're talking about somebody who knows what they're doing, the broker will suggest "transfering" money from one stock to another. So much easier to take when you put it that way.
Absent a decent broker, investors are left to fend for themselves, often making age-old mistakes. Statman talks of running into someone at a conference who had lost a chunk of change on dot-com stocks and was still hanging on to them. "At first they went up like crazy and he wouldn't sell because he didn't want to pay taxes, and now he wouldn't sell because he remembered what they were worth," says Statman. What's funny, of course, is that even though taxes were the supposed reason for not selling when the stocks were up, the opportunity to take a tax loss was not seen as reasonable justification for selling. So it goes.
Professional investors are supposed to be dispassionate about this -- something about how much easier it is to be cold-blooded with other people's money -- "but on any given day we have our biases," says Spears Benzak Salomon & Farrell market strategist Charles Crane, who runs money for high-net-worth individuals, pension funds and nonprofits. "We all have our fatal attractions."
To combat those impulses, Crane says, he and his colleagues stick to price targets on positions and sell when those targets get hit. He also notes that when people in the media ask him what stocks he likes, they rarely ask him what his price target is and almost never follow up later to see if he still likes the stock.
On the occassions that someone does come out and say it's high time to sell, the idea often gets heaped with scorn. Credit Suisse Asset Management's Stanley Nabi, a value investor, talks of going on
in March 2000 and saying that tech and telecom prices were inflated. One of the anchors complained (in the derisive way that one of the anchors was particularly good at) that he'd been complaining about tech and telecom valuations for a long time, yet the stocks kept going up. Nabi said that tech and telecom valuations had been ridiculous for a long time.
In hindsight he was right. But because we always fantasize about what it would have been like to time the market perfectly rather than mundanely preserve and grow capital, Nabi is nobody's hero.