Studies of Life

Learning by doing.

A Simple Rule to Systematically Sell Stocks

29 July 2015 by Jim

I’ve been thinking about a systematic way to sell stocks because I don’t like using my ‘intuition’. Some suggested rules I’ve read about are things like:

  • sell when the price falls below the 200 day moving average (I don’t believe in technical analysis because it has no precise and academically validated rules.)
  • sell when you’ve lost 20% or won 50% on a position (My ‘position’ is an arbitrary concept that gives no information whatsoever about the underlying stock.)
  • etc.

I’ve already explained that I no longer use limit orders because of events like the flash crash of 2010, and because with my broker, it’s a pain in the ass to enter limit orders for 20 or 25 different stocks. I have to renew them every. single. month. Ain’t nobody got time fo’ dat!

So what’s the best option to sell? I was thinking hard about this, researching things, and then it hit me. I had the solution under my nose all the time: my ranking system.

The Trending Value stock selection process I use depends on ranking stocks in terms of fundamental data, including value aspects like P/S, P/E, P/B, EBITDA/EV, the Piotroski score and the trailing 6 month return. I basically filter out the worst stocks in these categories so I end up with a list of the best 100-200 in my investable universe (US, Canadian and EU stocks) and I then rank that list by using the PERCENTRANK formula in Excel on each metric, and then combining the different PERCENTRANKS to get a global score from 0-100%.

My whole system is based on the following assumption: stocks with a high overall score in my least are cheap, high-quality and in an uptrend, so they outperform other stocks.

If this assumption is true, and my portfolio performance suggest that it is not entirely wrong to say the least, then I should sell stocks as soon as they no longer fulfil the criteria that pushed me to buy them.

How do I do that?

I rank the stocks in my portfolio with the exact same method explained above during my monthly finance / portfolio check. And then I sell the bad eggs and replace them with fresh stocks that do fulfil my criteria. Here’s what the current ranking looks like for the stocks in my portfolio:

Portfolio stock ranking

Of course, I don’t want to have to sell half my portfolio each month (too many commissions) so I limit my selling / buying in such a way that my annual turnover is 100% of my stock portfolio, i.e. the average holding period for a stock will be 12 months, but a particularly good one can stay in much longer, and a bad one will leave much faster.

In practice, since my stocks represent each about 4% of my total stock allocation, I sell the two worst ranked stocks in my portfolio each month to replace them with two fresh ones. This way I do not have too many commissions to pay for.

The positive side effect is that selling is automatic now. No more questioning decisions or worrying.

And because my selling routine is based on the same metrics I use to select stocks in the first place, the average portfolio quality will be higher than it has been in the past, because the two worst stocks, i.e. those reducing my average Piotroski / value / trend score the most, are the next ones to leave.

If you use any kind of ranking system, then this is a very easy way to find out when to sell. I’m almost ashamed I didn’t notice this earlier…


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