Do you want to know the single greatest attribute required to be a consistently successful investor, asks Landon Whaley?
The ability to sell. No, I’m not talking about a David Koresh-esque ability to sell yourself as the final prophet; I’m talking about both an articulated strategy for selling long positions that aren’t working and for short-selling stocks poised to take the elevator shaft lower. In the investing game, if you want to be great, you’d better learn how to sell.
First, you must have an articulated sell strategy for your long positions because the only aspect of an investing outcome that is under your control is the losses you take on losing trades. Generating positive returns each calendar year regardless of economic or financial market conditions requires you to minimize the time spent in a capital drawdown, and the only way to do that is to limit the losses on individual trades. Most investors don’t realize that their performance each year is entirely determined by the number and size of their losers and not by the greatness of their winners.
Second, the need for an articulated short selling strategy is simple math. Since Q1 1990, the US has spent 48% of that time in either a spring or summer fundamental gravity (bullish), 31% in fall (nuanced but mildly bearish), and 21% of that period in winter (as bearish as Yogi and Boo Boo). If you aren’t a competent short seller, then you missed profitable opportunities and enhanced downside risk management during the 52% of the time when the US was experiencing bearish market conditions. To be a consistently successful investor, you must be able to play the investing game in all four seasons.
Do you know who doesn’t have either of these “sell” capabilities? Wall Street. Every time we turn around, these cats are telling you to “buy, buy, buy!” Case in point, Goldman Sachs just raised their year-end (only 76 trading days away) target on the S&P 500 by +20%, after a +53% rally off the March 23 low. Apple’s most vocal cheerleader, Dan Ives from Wedbush Securities, just raised his price target for AAPL to a cool $700 per share (pre-split). Again, this +40% increase in the price target for Apple comes after a +44% year-to-date return.
On Wall Street, “sell” is a four-letter word because their entire compensation structure requires enticing more and more capital inflows to grow assets under management and cram IPOs down the throats of unsuspecting investors. They never want you to sell any investment you make, and they hound you to continually add more of your hard-earned shekels regardless of prevailing economic or financial market conditions!
Speaking of which, when was the last time you saw a “sell” rating on a stock? Folks, you’ve got a better chance of waking up tomorrow with your head sewn to the carpet.
There are currently 3,214 US stocks that carry an analyst rating. Out of these more than three thousand publicly traded companies, only 30 are rated “sell,” and just two companies have the dreaded “strong sell” rating.
In addition to the 32 companies with the analyst-equivalent of Covid-19, there are 2,251 companies with a “strong-buy” or “buy” rating and 931 with a “hold” rating. Wall Street analysts are telling investors that 70% of US stocks are worthy of investment, 29% of stocks should be treated with a “wait and see” approach, and only 1% are filthy animals. I couldn’t make this up if I tried!
You see, as an analyst, once you’ve slapped a “sell” rating (or even a “hold”) on a company, then your firm is never getting that company’s investment-banking business. On Wall Street, that’s a big no-no because the IB division of any firm produces far more revenue than research.
The headline risk bottom line is that Wall Street can’t sell. Still, if you’re interested in wealth preservation and creation with minimal drawdowns, then you’ll heed my guidance. First, learn to sell your losers on the long side quickly. Second, and as importantly, learn to put the children to bed and go huntin’ for wabbit (opportunistically short stocks) when it’s a fall or winter fundamental gravity.
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