June 22, 2012 – When to Sell

Over the years I have met many investors who have one major complaint “My advisor has never, ever told me to sell.”

Many investors feel that, indeed, “sell” is not in their advisor’s vocabulary.

Our industry is well known for preaching a buy and hold strategy. These days many investors feel that strategy should be called “buy and hope.”

So, what are the indicators when you should sell out of an investment? Let’s look at some of the factors you should take into account. This works not only for the overall market but also for sectors of the market.

First, what is everyone else buying and are they buying with enthusiasm?

When everyone is buying you should be selling. This is really hard to do because the buyers are buying for what appears to be very sound reasons. And, their enthusiasm can be contagious. Often the media, analysts and advisors are caught up as well.

But even if investors are not buying the overall market, are there particular sectors that are popular? How easy is it to raise capital in that sector?

Let’s look at current conditions. There is little doubt that most investors are not buying the overall market and those that are buying are not doing so enthusiastically.

However, there is spirited purchasing of two sectors – long term bonds and real estate investment trusts (REITs). The story on both sectors is great.

Bonds have not had a negative year since 1999 and for years you have been hearing that bonds are safe. In light of the continued weakness in the world’s economies and the potential for further trouble in Europe, bonds seem to be a decent investment. Seems to be a compelling story.

REIT’s are the best performing sector in the last year. They are presently paying more than bonds, they provide a bit of a tax break and the face value has risen nicely over the last few years. The underlying real estate is in everything from seniors homes to boring warehouses and prime, downtown real estate. They have held up really well while the stock market has tanked. Seems to be a compelling story.

In both cases we see new issues every day as the appetite of investors continues to grow. It is easy to raise money for these investments.

How can you lose?

Well, investors have lost in the past.

Bonds rose in 1998 when the stock market fell during the Asian currency crisis and the bankruptcy of Russia. When stock markets soared in 1999 and interest rates rose dramatically, bonds fell.

Real estate was considered impervious in 1989. The stock market had crashed in 1987 but real estate in Canada kept booming. I remember during 1989 people buying real estate in Toronto in the morning, selling it in the afternoon and making $10,000 a day.

Then real estate crashed badly.  Several REIT’s went bankrupt. So did the Garmazian Brothers with their West Edmonton Mall development and the Reichmann’s with Canary Wharf. As well, several clients, who owned rental properties locally, lamented that if they could just get their money back on their properties they would be very happy. They had to wait until 2002 to do that.

Real estate and bond markets boomed when stock markets fell in the past and fell when stock markets rose. Both sectors warrant more than a little caution. See Chapter 5 of my book for a more detailed history.


This article was prepared solely by Larry Short who is a registered representative of HollisWealth™ (a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada). The views and opinions, including any recommendations, expressed in this article are those of Larry Short alone and not those of HollisWealth™ Trademark of The Bank of Nova Scotia, used under license.

 

This article was prepared solely by Larry Short who is a registered representative of HollisWealth®, a division of Industrial Alliance Securities Inc. (iA Securities), a member of the Canadian Investor Protection Fund (CIPF) and the Investment Industry Regulatory Organization of Canada (IIROC).The views and opinions, including any recommendations, expressed in this article are those of Larry Short alone and not those of HollisWealth®