Portfolio Management Rules Regarding Selling

In this brief report we cover five reasons to sell a position and how to sell positions during a bull market. This is in part how we run the model portfolio. We hope this will be helpful to everyone.

1. Sell if you have a 20% loss

We always abide by a rule to sell positions that become a 20% loss. It obviously works much better in a bear market (as stocks trend lower and lower) but it is important to keep in mind. A 20% loss on a 5% position limits the portfolio to a 1% loss on a single position.

That being said, a bull market will usually bail you out of a bad entry point. If you bought (removed) close to the high then you are probably down over 20%. Time and the bull market will likely bail you out.

However, if you are going to chase stocks that are already overbought and somewhat parabolic then it is best to use a tighter mental stop loss. Say 10% instead of 20%.

Ultimately, we should ask ourselves if something “could” go down 20% in the near term. If the answer is yes then it is probably best to wait for a better entry point. Wait for that stock to correct or consolidate and look to buy something else.

2. Sell if the stock closes below its 400-day or 80-week moving average

This is a technical reason and it probably won’t be an issue for the sector anytime soon. Nevertheless it is something to definitely keep in mind for mining stocks and all assets and markets.

3. Sell if the fundamentals change

This seems straight-forward but it also includes selling if our perception of the fundamentals changes.

Recent examples of that include our decision to sell (removed) and sell half of (removed). We noted the intel we received about (removed) project possibly having issues as well as the poor performance of the stock. The stock has (removed) but we don’t feel bad about selling the stock. The potential issues with (removed) could come to light at somepoint.

The same can be said regarding the (removed). Maybe there won’t be any issues for either company but nevertheless it was clear to us that there were potential fundamental risks for both companies. I will note that sometimes it can take a few quarters or even a few years for some of these risks to come to fruition.

(Removed) could be a pending example. They still have many more (removed) to report but (removed). Another (removed) would give us a fundamental reason to abandon the stock. Of course the sale price would likely be lower in that scenario.

4. Sell if you find a better opportunity

Consider replacing laggards with stocks that are better values or opportunities. For example, right now, there are better opportunities in the junior exploration companies that have sub $40 Million market caps. We’ve covered a few of them over the past month.

Also, if my anticipation is correct, we could have a broad-based sector correction after Gold hits $1500-$1550. If you missed “quality” the first time around, you would have another chance to buy it. A broad-based correction allows an opportunity to reshuffle the portfolio as the correction would create new opportunities.

5. Sell if position becomes too large or overvalued

If a position becomes too large (as part of a diversified portfolio) then consider selling part of the position to reduce its weighting in your portfolio. When (removed) it had nearly tripled in one month. The position became quite large as a percentage of the portfolio. We could have sold a fraction of it at the time. Now it’s (removed).

Note that (removed) is currently (removed) of our portfolio. It is a special situation in that it is a tiny company that is fairly valued with additional upside potential. It also is a strong takeover target and that would give us a chance to exit at an even higher profit. Thus, we are holding the full position. If a takeover target seems overvalued or extended, it could be a signal of a coming takeover.

How to Sell in a Bull Market

In a bull market, as we are in, it is best to sell positions in increments. In other words, scale out of the position a handful of times over a period of several years.

Let’s say I bought (removed) around (removed) and it could reach $50 in four or five years. It’s trading near (removed) right now. Perhaps I will sell 25% at $8, 25% at $15 and another 25% at $25. Note that you could buy back what you sold if the stock corrects. If not and the stock continues higher then you would put that capital into something else.

Junior exploration companies move faster and are much more volatile. We can employ the same strategy but should note that we need to be a bit more active with the strategy. In other words, it might take (removed) 18 to 24 months to reach $15-$20 while a junior exploration company can triple or rise 5-fold within a single year.

If the sector makes another move higher, as we expect and Gold is moving towards $1500 and GDX towards $40 then we definitely will be looking to take some profits. We will look to cut any laggards or underperformers as well as anything that looks overvalued or has limited upside. We will also trim some of our holdings by 25%. We noted in TDG #477 that we want to maintain a 60%-70% position in the sector.

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