CIO Insights - 22 February

Hi everyone 

The last week of the Aussie summer – where did that 3 months go?!

Last week our friends at Equity Mates released a podcast on what I think is a very important investing area – “How to Know When to Sell”. I was lucky enough to have been asked by Bryce and Alex to contribute my 3 minutes worth, along with a couple of others. After listening to the podcast, it became immediately obvious to me that you, the HM1 family, would probably be interested in better understanding for yourselves how experts decide when to sell a stock, and indeed, how the expert managers in HM1 decide if and when to close a position.

Before I get to that though, the portfolio had a small decline in value over the past week as demonstrated by the drop in our pre-tax NTA from $4.66 to $4.58. This was despite a couple of large positive moves in our conference stock portfolio, namely Treasury Wine Estates (up 10% for the week) and Yeahka Limited (Hong Kong based Chinese payments processing company), which closed the week up 13%, after being up 26% for the week at one stage. So, what hurt? As you know, a stronger Aussie dollar is a headwind for the portfolio, and we also saw some profit taking in a couple of our larger core stocks that have experienced strong rallies recently. We are also in the midst of the local reporting season, and even though CSL reported what appeared to be a very impressive first half, some analysts weren’t as comfortable with the outlook CSL provided and downgraded their ratings. Our recommending manager, David Moberley from Paradice, remains comfortable with his investment thesis, and so we will continue to hold the stock.

HM1 will be holding its first Board meeting for 2021 tomorrow. If anything substantial is to come out of the meeting, it will be released to the ASX this week. I will also follow that up in my next weekly update.

So how does one know when to sell a stock in their portfolio?

Before that, please note that this is not investment advice, rather it is a summary of what was said in the podcast last week, as well as some of my own personal observations. As always, talk to your financial adviser before making any decisions.

The first reason people sell stocks is because they need the money for something else, be it retirement expenses, a holiday, a house, a new car, or something of that ilk. Obvious enough. Nothing more needs saying on that one I’m sure.

The second reason individuals and fund managers sell stocks is that they’ve found what they think is a better investment for their capital. Again, obvious enough. If you have a fixed pool of capital and you are fully invested, and find something fresh you want to invest in, you have to sell something to fund it.

Thirdly, investors sell when they realise they have made a mistake in their investment thesis, have lost money, and can no longer bear to take further losses. This is often called a stop-loss.

Do the experts do things any differently?

One rule many professional money managers have in their portfolios is that a position must be trimmed when it becomes a certain pre-determined percentage of the portfolio. I mentioned in the podcast that Cathie Wood, who you all know pitched Tesla and then Teladoc at our conferences, has a mandate that requires her to sell stocks when they exceed 10% of their portfolio, such that the maximum exposure is 10%. Other managers have different levels that force some selling, but the theme is the same – take some profits. HM1 has an embedded limit like this also. Some will say, “ride your winners”, and for some managers (and individuals) this works, allowing what is sometimes termed “The 8th Wonder of the world – compounding” to run its course. Of course, the flip side is that you can’t go broke taking a profit.

The experts, just like the novices, do get it wrong occasionally. From what I’ve seen in my 30 years in equity markets, and in my time at HM1, the best managers are the ones who realise they are wrong the quickest, and then act on it the quickest. No ego, no tears, just acknowledgement that the reason they bought (or in HM1’s case, recommended) the stock is no longer relevant, and the probability of loss has become greater than the probability of gain. Simple, but oh so important.

Another way many investors look at whether to hold a stock is to ask themselves the question, “Would I buy it at todays price?” If the answer is a yes, then obviously they don’t sell. Alternatively, if you wouldn’t buy it at todays level, then you perhaps need to ask yourself whether you should be holding it.

And a final missive from one Millennial to some of his fellow younger cohort (no, not me, but my 22yo son), who when I asked him how he looks at it, gave what I thought was a great perspective. He said, “If your FOMO (“fear of missing out”)  is greater than your FOL (“fear of losing”) then you don’t sell.”


If you would feel worse seeing a stock keep rallying after you sold than how you would feel by not selling it and seeing it fall, then there is reason not to sell. Most of us have locked in gains on a stock, only to see it keep going up. Most of us have held on when we’ve thought about selling and seen the stock fall.

What makes you feel worse? FOMO or FOL?

Sage words from a young head.

Stay safe,

Rory Lucas
Chief Investment Officer
Hearts and Minds Investments Limited

Reminder: these are simply my general views and should not be taken as investment advice


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DISCLAIMER: This communication has been prepared by Hearts and Minds Investments Limited (ABN 61 628 753 220). In preparing this document the investment objectives, financial situation or particular needs of an individual have not been considered. You should not rely on the opinions, advice, recommendations and other information contained in this publication alone. This publication has been prepared to provide you with general information only. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Past performance is not a reliable indicator of future performance. This document may not be reproduced or copies circulated without prior authority from Hearts and Minds Investments Limited.