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The Gazette (Montreal)
November 13, 2003

When to sell
Listen to the pros: Watch a company's balance sheet and the balance of your portfolio — and don't get emotional — are some tips

By Paul Delean

Buying stocks or mutual funds is the easy part of investing. Selling is the real challenge.

So when do you know it's time to unload a stock that's done well, or badly?

Industry professionals look for hints in statistical models and company financial statements.

Sebastian Van Berkom, Montreal-based manager of the Talvest Small-Cap Canadian Equity fund, said he buys only stocks he believes can double in value over a five-year period.

And he'll hold for as long as that remains true, though he might trim back the size of the holding if appreciation of the stock unbalances the portfolio.

"I never want more than six percent of the assets (in the portfolio) in any one stock. That's too much concentration in the small-cap area," he said.

Van Berkom said if an individual investor has no grasp of a company's balance sheet and no real interest in financial details like projected rate of return, he or she shouldn't be buying stocks. "If you're not ready to do the homework yourself, you should buy mutual funds or use a professional manager."

Christine Decarie, an Investors Group mutual-fund manager, also tracks weightings closely. She said she rarely has a target price in mind when she buys a stock. If it appreciates considerably, she'll usually trim her position.

"By selling positions that outperform, you maintain the level of risk. If you don't trade, you increase it. Having a high percentage of a portfolio in one stock is very risky — whatever the stock. Just look what happened to Bombardier or Nortel."

If the value of a holding drops below one percent of the total portfolio, she'll take a hard look at buying more or selling off.

"If I don't want it to be at least one percent of my fund, why do I even own it?" Decarie said.

Companies that begin to stretch their balance sheets, make risky strategic moves, change managers or add a lot of debt could also get the axe, whatever the price paid.

Remaining impersonal is a key to success, Decarie said.

"The most difficult part of selling is the emotion involved. By selling a stock doing well, it's like you're saying it's not going up any more. And if it continues to go up, people think more of what they missed than the risk they reduced. People feel good about it only if the stock starts to go down abruptly."

Keith Graham, manager of the AGF Canadian Real Value fund, said a change of circumstances for a company is one of his main sell signals. "Maybe management's left. There's been a merger or acquisition. Maybe the stock is fully valued, or there's a better opportunity elsewhere."

Ian Ainsworth, manager of the Mackenzie Universal Global Future fund, said the time to sell a stock is when you detect a deterioration of the fundamentals, like an earnings drop or lower return on assets.

"You don't want to be holding a company when the earnings aren't growing," he said.

Benj Gallander, author of the investment newsletter Contra the Heard, said he has a target sell price in mind before he even buys a stock. The minimum target would be 50 percent above the purchase price. Often, it's 300 or 400 percent.

"Setting a sell target initially gives us a certain amount of discipline," Gallander said.

"There's no emotion attached to it. A weakness most people have is they have no idea when they want to sell. They blow with the breezes. If they have a stock that drops from $5 to $2, then goes back to $5, they might sell just to get their money back."

Not that Gallander sells automatically if and when the stock hits the target. He might sell a portion, or none at all. Each case has to be analyzed individually.

And he's not reluctant to dump losers, often for tax purposes. Stelco exited his portfolio this year. He sold at $1.10 and $1.29 after paying an average of $3.57.

"A lot of people find that difficult, no question about it. But it's a very impersonal thing for me. I'm not in love with any of my stocks any more. They don't love me back." Gallander said.

"You buy a certain number of stocks, and a percentage of them will be losers. The key is how much money is in your pocket at the end of the day."

With mutual funds, the selling process is a little different.

Most mutual-fund owners have — or should have — a variety of investments, each accounting for a set percentage of the overall stake. When one investment takes off, its percentage naturally grows.

Regular rebalancing of the portfolio means cutting back on areas of the portfolio that performed well and shoring up the ones that lagged, effectively reducing risk. Experts are divided about how often portfolios should be rejigged. Some say quarterly. Van Berkom believes once a year is sufficient.

Liquidating a fund completely rarely works to an investor's advantage. The one situation that justifies it, analysts said, is when the manager leaves.

"As long as the manager you bought it for is still there, stick with it," Van Berkom said.

"Don't get sucked in to changing your mutual-fund selections repeatedly. Retail investors are known for selling low and buying high. They panic. It takes discipline to stay the course, but that's usually the best route."

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