Factors to Consider before Selling

Continuing with our portfolio adjustments today and some more thoughts on portfolio allocation and risk ratios, which are highly dependent on target prices.

A target price is good for weighing risk/reward, but shouldn’t be used for decision making in terms of when to sell. Investments need to be reassessed before any of those decisions can be made.  When we review individual stock investments, we consider a number of different factors.

As trend followers, we begin with reviewing the themes we’re following. If our outlook has changed on a particular trend, we’d look to get out of any positions that play into that trend.

However, we rarely change the trends we follow (we look for long term themes/trends) so that’s not often the case. Assuming the stock fits into our current themes, we look at the individual stock from both a fundamental and technical standpoint. We prefer undervalued businesses, but are more concerned with momentum over the previous 3/6/12 months. It’s tough to go against the crowd for a long period anyway.

Assuming we still like the business, we then assign a new target price and set a new stop loss to get a new risk ratio. These target prices tend to be realistic and optimistic, as we’ve already determined that we believe strongly in the theme and are now looking for the best case scenarios. Regardless of the new risk ratio, no action is taken until reviewing the entire portfolio.

After updating all holdings, we  can then review how each stock plays into the portfolio as a whole. At times, we may see the need to add some risk by exchange particularly low reward positions for stocks with greater upside. By assigning both a target and stop loss price, it’s possible to quickly get a best/worst case scenario for the portfolio as a whole, making these decisions much easier than when looking at a stock in isolation.


NOTE: Howard Lindzon’s post about someone asking when to sell $600k worth of Bitcoin inspired my thinking about all the other factors that go into deciding when to sell outside of price. M

Risk Ratio & Asset Allocation

Continuing on our recent theme of structuring and building stock and alternative investment portfolios, I wanted to share a few thoughts on how risk ratios play into asset allocation.

When assessing any opportunity, it’s important to look at the best and worst case scenario, at least taken to a reasonable degree, then compare the potential gains versus the potential losses to get a risk ratio. Defining the downside is relatively easy stocks by setting stop losses set at a reasonable amount below the investment value.

In alternative investments, it’s not quite as easy as setting a stop loss sell price. To start, there’s the problem of valuing alternative assets. Values can only be considered estimates until a sale occurs, as prices often can fluctuate significantly in private asset sales. That leads to the second problem of a limited market of buyers for alternative assets. Alternative assets are decidedly less liquid than stocks, so when considering the worst case scenario, you need to consider the actual value if you needed to liquidate for cash within a reasonable amount of time. That time changes based on cashflow requirements, type of asset, and other variables that can be assessed on a case by case basis.

The upside is a relative guess for both stocks and alternative investments, though assets like real estate are typically much easier to estimate than a single stock or a single angel investment. In all cases, it’s important to come up with a reasonable estimate of the target value, should everything go right.

From there, it’s easy to get a risk ratio by dividing the potential gain by the potential loss. A high risk ratio means there’s more upside and implies the likelihood is decreased. While true, it’s important to account for how much capital is at stake and know how often you need to be right in order to win.

Working through these numbers before making an investment can help visualize how the investment plays into your portfolio, in terms of capital at stake, the worst/best case scenarios.

For our own investments, we set our numbers at the initial time of investment, then reassess occasionally by updating the target price, market/estimated value, low value, etc in a spreadsheet, based on any new information/developments. By using the spreadsheet, we get a chance to quickly reassess each investment and see how our assumptions affect our portfolio as a whole, potentially triggering other changes, including changes to our asset allocation.


Our own spreadsheet is based on Chris Perruna’s spreadsheets, which he included in a post on Position Sizing & Expectancy. Give that a read for more info.

We’re working on updating our portfolio tracking spreadsheet to work with a combination of stocks, crypto, and alternative investments. We’ll share a template when complete.