Donald Cassidy's tips on how to make profitable sell decisions

Leading Lipper researcher Donald Cassidy says success in stock investing is not only dependent on which shares you are buying, and when you are buying them. It’s the sell decision, which is key.

“Investors actually earn profits only when they sell. So they should pay equal attention to the neglected but equally important second side of the investment coin, which is selling,” Cassidy said.

Donald L. Cassidy was a senior research analyst with Lipper Inc from 1990-2006. His areas of specialty included closed-end funds, mutual funds, investor psychology and behavioural finance. He was also formerly a senior analyst with a regional brokerage firm based in Denver, Colorado, USA.

Cassidy is a graduate of the Wharton School at the University of Pennsylvania and is a member of the CFA Society of Colorado. He has often given valuable lectures to CFA societies internationally and has also served on the faculty of Harvard University’s annual congress on the psychology of investing.

“You haven’t made your profits until you have the money in hand — and that doesn’t happen until you sell your shares,” he says in his book It’s When You Sell that Counts.

(Masters of the Markets: Read up other investing strategies and trading tips from market greats)

He believes fear, greed and just plain confusion lead many investors to postpone their desire to sell shares almost indefinitely, or for a very long time and by the time they decide to sell shares they would miss out on the right time and opportunity for selling.

Cassidy is also the author of many famous books like Trading on Volume, When The Dow Breaks and 30 Strategies for High Profit Investment Success.

Be careful of emotional barriers

In order to amass successful returns investors need to know how to deal with their emotional barriers to selling.

“Because market psychology works on us all as investors, you must specifically work on learning to sell well, or you will predictably do it badly,” says he.

Cassidy says in order to avoid losses, investors need to learn how to set selling price targets; how to time sale in a bull market and whether to sell or hold in a bear market.

Cassidy’s book It’s When You Sell… educates investors on all the above scenarios. It provides guidance on selling shares profitably as a failure to offload them at the right time is a common pitfall that investors fall into. The book is regarded as an investment masterclass and is very well appreciated in the investor community.

Factors that prevent profitable selling

Cassidy says success in investing requires an understanding of the factors that influence the investment landscape. So, he feels in order to understand how to sell well, investors must first recognise and understand the important influences that create hurdles.

The two sorts of barriers that prevent investors to sell profitably are: external and mental factors.

External factors

Cassidy says there are several external factors that prevent stock selling. He feels these factors provide a systematic bias towards holding stocks for a long time and discourage selling.

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He believes investors generally remain optimistic about their holdings and find selling stocks not a natural thing to do as it is not part of their culture.

“Most investors tend to be well-off, experiencing progress over time. Therefore selling, which is an act of closing off or ending, appears an unnatural thing to do, probably one that will inhibit rather than enhance gain. Thus, we feel the odds are against us if we sell,” he says.

Cassidy says, financial media also plays a major role in putting pressure on investors’ psychology as there is a lot of gossip and market chatter that forces investors to hold some stocks continuously even if they want to sell them.

He feels brokerages encourage long-term holding of stocks as they want to project that they are cautious and act with responsibility when they are managing investors’ portfolios.

“Brokers who practise frequent selling are branded churners. The unspoken assumption behind the hold-forever mantra is that you own the right stuff and it will forever remain such. And on a personal level we each know of someone who mistakenly sold a super-growth stock years ago and missed a tenfold or greater gain,” he says.

Cassidy feels selling frequently by traders is viewed as an evil and they are termed as gross speculators, and thus bad investors.

On the other hand, traders who practise the ‘buy and hold’ strategy even if their investments have no profitable future, are well respected and termed as patient investors as patience, after all, is reputedly a virtue.

Also, he believes many investors do not want to take the trouble of doing intensive and thorough research and take time out to study a stock. He feels if investors sell a stock, they know they have to find and buy a replacement for it which may take study time and raise predictable decision- making stress, which is simply avoided when a stock is simply held for a long time.

Psychological factors

Cassidy believes personal psychology is a baggage that all investors bring with them to the market which is very difficult to shed off. He feels egos of investors get in the way of successful investment results as its human tendency to equate self-worth with money and in investing, money comes from being right.

“Investors wish to be not merely right, but perfectly right. However, most people also know that they will not sell at the all-time (or even the week’s) high, so they avoid exposing their egos to self-imposed feelings of inadequacy by not taking any action. Holding winners forever leaves them always present to stroke the ego. Selling a stock that has done well evokes the pain of parting with a beloved pet or favorite collection, while selling a loser admits defeat and an intellectual shortcoming. Why abuse the ego when it’s not necessary?” he says.

Cassidy believes on a day to day basis, events such as general-market and specific-stock price movements are so intense that they trigger investors to make wrong moves like selling in panic in one direction and buying with the crowd.

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He feels financial media, TV channels and the internet are both a blessing and a curse for investors. Although vast amounts of information is freely and immediately available for investors, investors tend to overreact to this excess of stimuli.

Also, he says friends and acquaintances unknowingly act to thwart any contrarian intent. “Tell them you are selling an overpriced market favorite or refusing to sell during a market panic attack, and they will unleash a firestorm of “reasons” the crowd believes you are wrong,” says he.

Cassidy feels if investors can recognize and understand the enemies behind profitable selling then they have a better chance of overcoming them.

“It cannot be emphasised too strongly that selling must become a routine act—as normal in your own mind as buying. Because of how emotions like fear and greed operate in the internet age, you must become a nimble and proactive seller. Investors get paid much more to anticipate changes than to react to something that has been publicly reported,” he says.

Cassidy, in his book revealed some pointers that can guide investors to overcome some of the hurdles and make intelligent sell decisions confidently. Let’s look at some of them.

  • Challenge yourself and move towards discomfort

Cassidy believes success in investment cannot come from actions that make investors comfortable. He feels the buy and hold strategy and following the herd are the easiest approaches to take.

He said for profitable selling and good decision making, it is important for investors to move towards discomfort and conduct a careful analysis on whether to keep holding a stock or not.

“Buying or holding when stocks are high (following the crowd because you cannot abide ‘missing the action’) is a comfort-seeking decision. Likewise, fearful selling in a collapsing and low market is moving toward the comfort of cash – again at just the wrong time. Good decisions involve thoughtful analysis including pro-and-con lists,” he says.

He believes investors tend to make decisions that are obvious and play it safe and go with the crowd but it takes a lot of courage to do the exact opposite of what the crowd is doing.

“Hold and/or buy when it is scariest and sell when the majority celebrate their brilliant conquests. Right, contrarian actions are always lonely and very uncomfortable,” he says.

  • Don’t hold corporate winners for long

Cassidy said the odds of a company to dominate for a long time in the market is extremely low due to rapid changes in technologies, regulations, internationalization and competitors’ position. So he warns investors against holding these companies for long as it may lead to huge losses in the future.

“Companies rarely control the top of the hill for long; those situated there are priced very dearly. Holding them exposes your capital to sudden devastating loss at any sign of faltering momentum,” he says.

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He suggests holding the stocks of a small number of mutual fund managers who are recording above-average returns consistently.

On the other hand, he feels individual stocks of current corporate winners are always at extreme statistical risk of going down. “In the long run, there is no ‘business as usual’,” he says.

  • Don’t buy a stock without a sell target in mind

Cassidy said investors who buy a stock without having a target in mind are bound to suffer losses as this mentality reveals that they are unfocused and unclear about their investment objective.

“Your target should include all three of these: a price objective, driven by a scenario, in a specific time frame. If your price is reached, or if the scenario does not play in the anticipated time, you must sell rather than rationalize,” he says.

Cassidy suggests investors to not buy stocks merely because they like the industry, respect management, or agree with their social goals.

He feels there should be a driver that is bound to push the stock higher and there shouldn’t be any other reason to buy the stock. “The objective is profit, not good feelings!” he says.

  • Let go of your underperforming favorite stocks

Cassidy says bad news for a company, seldom appears solo and is very likely to be followed by a series of other problems for the company. He says as there are thousands of stocks available, there is no point in remaining loyal to under-performers.

“Stocks are not insulted by your selling them! Move on to what is working rather than sticking with the sleeping dogs or bad ones,” he says.

  • Develop the ability to sell short!

Cassidy says as it is a known fact that stock prices can both rise and fall so investors shouldn’t be biased and look for profits in only one of the two available directions.

“Shorting is not unpatriotic, morally wrong, or foolish – just an underutilized tool. Stocks get overpriced (fundamentally) and overbought (technically) exactly as many times as they’re cheap and oversold – because prices move in waves, whose tops and bottoms are equal in number,” he says.

Cassidy advises investors to not cut their opportunities to half by only focusing on buying. “Would you fervently eschew a raincoat or umbrella because the weather is fair more days than not? Discard this self-imposed limitation!” he says.

Cassidy feels if investors can keep these points in mind while investing then they would find it easier to make profitable sell decisions rather than looking for a “needle-in-a-haystack stock” that may or may not rise as long as they live.

Cassidy believes an approach to proactive selling provides above-average returns by protecting capital and capturing excess returns when available. Surely, if investors can incorporate these lessons in their investment strategy they are quite likely to prevent huge losses and pain that a bear market can cause.

(Disclaimer: This article is based on Donald Cassidy’s book “It’s When You Sell that Counts”.)



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