The problem with tracking stocks you’ve sold

Portfolio management

Money managers are not so good at selling

A study has shown that professional money managers beat the market with their buy decisions and trail the market with their sell decisions. I’ll explain what this means in a moment. But, the essential conclusion of the study is that professional money managers are better at buying stocks than at selling them.

The question I look at in this post is whether it makes sense to track stocks after you have sold them to try to improve your sell decisions. My own practice is that when I have sold a stock, I never look at it again. The only exception is if I sell stock in a great company that has become grossly overpriced. I may keep an eye on it with the thought of buying back in if it sinks to a bargain price. This seldom happens.

The study

The research by Chicago Booth PhD candidate Klakow Akepanidtaworn, Carnegie Mellon’s Alex Imas, Inalytics’s Rick Di Mascio, and MIT’s Lawrence Schmidt published in 2019 is titled: Selling Fast and Buying Slow: Heuristics and Trading Performance of Institutional Investors

The paper offers an alternative explanation for why active management tends not to beat the market. The answer they give is that while professional money managers may be good at buying, they are not so good at selling.

They examined 2 million sell and 2.4 million buy decisions between 2000 and 2016, tracking 783 portfolios with an average value of $573 million.

Their conclusion: “We find very strong evidence that buy trades add value relative to our random buy [portfolio].” The problem is that “managers’ actual sell trades underperform a simple random selling strategy.” This is stunning. The professional money managers would have been further ahead to simply pick stocks from their portfolios at random to sell, rather than making the ‘human’ sell decisions they actually made. They should have used darts rather than their brains.

For present purposes, let’s just go with the idea that picking and buying stocks, on the one hand, and selling stocks are two different tasks. Both are hard to get right.

My basic rule is that I never sell a stock unless the company is no longer the superb company I thought it was. It has little to do with price. The company has become a loser. It’s not that the price shows a loss.

Improving your selling ability

Can we improve our selling by keeping track of all our sell decisions and see how they turn out in six months or a year or two years? This is what Annie Duke suggests in her book Quit – The power of knowing when to walk away, published in 2022.

Annie Duke is a bestselling author, a former professional poker player and currently a consultant in the decision-making space. She recommends that investors “Create a book that tracks those sell-side decisions and see how they’re doing compared to a benchmark of how they would have done if they randomly sold something different in the portfolio at the same time.” (Duke, 2022) p64

Tracking sell decisions

This is not something I have ever done and having read and reflected on Annie Duke’s suggestion, it’s not something I have any intention of doing. I have no interest in looking at the price the sold stock is selling for later. Shouldn’t we be curious to see if the price went up after we sold it? Not really. I have only sold a handful of stocks in the last ten years. I am aware that two of the companies have done reasonably well. I don’t regret my decisions in either case. My decisions to sell were based on a business analysis of each company and its prospects for the future. If they have done well, good on them.   

There is no doubt that selling is just as important as buying and may be tougher to get right. Like most things about investing, we can improve by reading about the best way of doing it and then go through the school of hard knocks to develop practical experience. Selling is freighted with a host of behavioral problems. I think of regret, the endowment effect around stocks we own, the sunk cost fallacy around our efforts to research, buy and then hold a stock, loss aversion when the price is down and so on. It’s a minefield.

Take a look at my post Minimizing regret is a loser’s strategy to get an idea of what we are up against. I can’t speak for professional money managers. Money managers are, after all, humans. I do think they are up against more pressures than individual investors. They have to worry about their careers, peer pressure, clients that will run at the drop of a hat, groupthink within their firms and so on. No wonder in their selling they suffer from a behavioral gap.

Conclusion

The need for investor skill around selling stocks is under appreciated. The study suggests that investors can beat the market in buying and then give up that edge through poor selling decisions. Investors can improve their selling skill through reading and hands on experience. I don’t think that keeping a book or list of sell decisions and checking prices a year or two down the road will help. It’s the overall performance of the ongoing portfolio that matters. If that is lagging the index, there may come a time when the investor should simply go into an index fund.

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Here’s a good place to start is to educate yourself about selling stocks. Check out these posts.

19 Cardinal rules on selling stocks

Cut your losses is confused advice

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Other posts on investment psychology

This post is part of a series. Readers are invited to read Investment psychology explainer for Mr. Market – introduction This will give you a better understanding of some of the terms and ideas and give you links to other posts in the series.

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You can reach me by email at rodney@investingmotherlode.com

I’m also on Twitter @rodneylksmith

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