We find ourselves in the sixth month of 2019 – a year that can definitely be described as a rollercoaster.
Just over a month ago investors were all excited to see the FTSE/JSE trading positive by 14.5% for this year (up to 23 April 2019) and there was a general feeling of optimism.
Now the market isn’t just struggling to keep its positive status for this year, but also to keep pessimism out of personal investments.
To quote the famous investor John Templeton: “Bull markets are born on pessimism, grown on scepticism, mature on optimism, and die on euphoria.
The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
As the optimism from just over a month ago turns to pessimism, I’m being asked more and more whether the time has now finally come to throw in the towel.
Unfortunately, the answer isn’t quite as simple as just “yes” or “no”.
But if I only had these two answers at my disposal, I would have to go with “no”.
If we take a look at analysts’ consensus forecasts (according to Thomson Reuters) on individual shares (based only on price forecasts, i.e. excluding dividends and adjusted according to their weight in the index) in the FTSE/JSE Top40, you can see that analysts still expect the Top40 Index to be trading 21.6% higher from current levels (48 465 as at 28 May 2019).
FTSE/JSE Top40 Index with Thomson Reuters target prices added to index
Source: Schalk Louw & Thomson Reuters
Getting back to the question about whether the time to sell has come… Well-known investor and writer, Philip Fisher, got it right in my opinion when he said that, “If the job has been correctly done when a common stock is purchased, the time to sell it is almost never.”
This is exactly why following a good strategy is so important.
Just make sure that your original reasons for the purchase are still in place: Did something significant change in the share (company) or its competitiveness?
Will you still be willing to purchase this company’s shares at current price levels?
If you answered no to the last question in context of the first, you may consider selling those shares.
Also ask yourself the following questions when trying to determine whether selling can be considered:
Did a much better opportunity arise in another share?
Another reason for selling a particular share may be attributed to the fact that you identified an opportunity that offers better prospects for your capital at the same level of risk, even though your reasons for purchasing the original share may still be very much in place.
Let’s suggest that in your original analysis, you determined that the company’s value could potentially rise by 12% per year.
You have just, however, identified another company that could offer potential growth of 20% per year.
This could definitely justify selling the original shares.
Is your portfolio too concentrated?
Maintaining a balanced portfolio may be another reason for selling shares or just minimising your position in a particular share.
If you were lucky enough to choose a winner of a share that grew by so much that it now makes up the bulk of your portfolio, wouldn’t that justify a sell?
There is no right answer to this question.
It depends entirely on your risk sensitivity and therefore remains a personal choice.
Did significant changes take place within the company?
Poor financial performance, unreliable management and an increasing competitive environment may also provide good reasons for you to sell.
In light of this, always revert back to the most important question: what were my original reasons for buying this share?
It remains important to evaluate each and every share in your portfolio on a regular basis.
Ask yourself the following questions: Were there significant changes made to the company that affected its business model, management and competitiveness?
If so, did these changes have an effect on my original reasons for buying the share?
Are there better investment opportunities available that I would rather invest my capital in?
Is there a particular share that takes up too much space in my total investment portfolio?
Have I considered the capital gains tax implications and possible costs attached to my final decision?
If you answer yes to one or more of these questions, you may definitely consider selling, knowing that you have done your homework properly.
Schalk Louw is a portfolio manager at PSG Wealth.