Dear Diary: Should I Sell?
This is where I find my investing diary so useful. In my diary (actually an Excel spreadsheet), I record not only when I bought a stock and the price, but how and why I calculated the target price. The "why" is critical, because reviewing my reasoning tells me if anything fundamental has changed that would justify a higher target price. This analysis tells me if I'm simply riding momentum (in which case, I should watch out and sell sooner rather than later) or if I've still got some solid reasons for holding onto that stock.
A lot of investors keep this kind of diary, and I highly recommend it to you.
But I like to take it a step further and keep notes on how I set the target price for each stock. This isn't so much a rehash of the method I used as a note on how I felt about the assumptions I used to make the forecast. Did I feel that I was reaching for the most positive assumptions in order to get to a target price that produced a 15% potential gain in the stock? (I use benchmark rates of return that go higher as my estimate of the risk in the stock increases.) Or did I feel the target price was based on relatively conservative estimates and that the stock had plenty of overhead above that target?
How is this kind of diary useful? Take the example of Nestle (NSRGY), a current member of my Jubak's Picks portfolio. When I bought it for the portfolio on Sept. 21, 2012, I set a 12-month target price of $69 a share. Share appreciation to that target plus Nestle's dividend would give me a 10.5% potential return on this pick. Not great, I wrote then, but good enough for a very tough market and good enough for a stock that carried very little risk. I would have set the target higher if the numbers had been there, but they weren't. In my diary I noted that I thought $69 a share was an aggressive target.
The stock closed at $68.61 a share on Wednesday. That's almost my target price. And from my diary entry-and after checking to see if anything fundamental has changed-I don't see raising the target price as justified. If I'm going to hold Nestle from here, I'm counting on gains from the market's momentum and not from fundamentals. That doesn't mean I'm going to sell immediately. But it does mean that I'm not going to delude myself that Nestle is anything more than a momentum play above $69. A buy/sell/hold decision on Nestle here is a judgment call on the market's momentum.
I'd contrast that diary entry on Nestle with the one on another member of my Jubak's Picks portfolio, Home Inns & Hotels Management (HMIN). That entry noted that the stock might have considerable headroom above the $34-a-share target price that I'd set-but that it was very hard to tell because key fundamental metrics such as occupancy rates and RevPAR (revenue per available room) were difficult to read at that moment because of a big acquisition and the effects of the Shanghai special exposition. If those metrics picked up with an acceleration in economic growth in China in the last quarter of the year, an increase in the target price would be justified, I noted to myself then.
With that note in mind, and even in this momentum market, I'd know to take a look at any changes in fundamentals and to see why I might know if fundamentals had changed before making a buy/sell/hold decision.
Keeping this kind of note about decisions to buy or sell or hold won't assure that you don't sell too early in a momentum market or hold on too long. It should, however, help you tell when a position is still based on fundamentals and when it's purely a momentum play. Making sure you know the difference is a critical step in making the most profit and taking the least loss in a momentum market, especially one that combines two different types of momentum.
Nobody said that a rising market didn't present any challenges.
At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this post in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Home Inns & Hotels Management as of the end of September.