Many books have been written on how to buy stocks while very few have been written on how to sell. Indeed, selling decision is much more complex and it involves emotional issues. After all, any investment vehicles are bought on hope, and once it is bought, it takes on a new life. Investor looks forward a rosy future. However, if the actual reality does not tally with the rosy future an investor has in mind, he then battles with his own ego. Psychological conflicts ensues, with these questions swirling in his mind:
- The stock went down but will it go down more or should I wait for a rally?
- Should I take small loss now rather than huge loss if it went down more?
The decision to hold onto a losing stock maintains hope which preserves the future. Selling a losing stock crushes that dream. That dream, of course, is that the future will be better than the present.
The above is the excerpt from a lesser known book by one of the investment team in Philip Capital Malaysia (PCM) with foreword from its CIO on the cover. Interesting because the concepts in the book is refreshing, it is short and direct to the point. One of the main thing discussed on selling a stock holding is what the authors call as Average True Range Exit (ATRE). ATRE takes into account market volatility and calculates the price difference between the high & low price of a stock on a particular day. The last 14 price bars is averaged, and then multiplied by a factor of 3. This is then subtracted from the low of each day as market progresses.
Here comes the interesting part. Should the price closes lower than 3 times the ATR subtracted from current price low, fund manager pull the trigger (SELL). It means supply is coming into the market (READ: price likely to drop) so we exit. Again the trend reversal could be due to various factors – bad news, insider sales, lack of demand, etc.
My take on this – not exactly value investing, but not truly only trading either. Professional fund managers need this to gain competitive edge in portfolio management in any market condition
I have not discover a retail brokerage which offers the above indicator (ATR). Anyone have experience?
Source: The Star
Another thing is review of this newpiece at TheStar. Despite GE13 and other mumbo-jumbo, FBM KLCI index ended on a higher note at 10.5 percent compared to 2012. Reflect on this and look at how your equivalent portfolio in KLSE performs. Interestingly, the Chief Investment Officer of PCM is featured in this very article. And while we thought FBM KLCI performed up to expectations, FTSE Bursa ACE Index and FTSE Bursa Small Cap Index are up over 35 percent. This explains why Cash Portfolio of most of my PCM Accounts performed up to such benchmark, while EPF Portfolio of most of my PCM Accounts, which consist mostly of conservative blue chip counters, are a bit of a laggard. I could see that EPF Portfolio investment are quite “restrictive”, for the lack of a better word (e.g. , no ACE market counters, but there are gems here, like OCK, if one knows how to discover them – see below)