In this episode of Motley Fool Answers, hosts Robert Brokamp and Alison Southwick want to focus on one question -- but it's a big one, especially for long-term investors: When should you sell a stock? To provide the answer, they've tapped Motley Fool Chief Investment Officer Andy Cross and Ron Gross, the advisor for Motley Fool Total Income.
In this segment, though, having covered the topic of selling in general, they tackle some questions from listeners. Among them: Is Tesla (NASDAQ: TSLA) overvalued? What was your worst "failure to sell" situation? And how has your investing style changed since you became a Fool?
A full transcript follows the video.
This video was recorded on Aug. 14, 2018.
Ron Gross: A lot of good questions have come in. I think we have some time to tackle some of them. This first one is going to be so painful, though. Painful is in the question. "Please describe a painful 'failure to sell' situation you found yourself in." Any former investors in Horsehead Holding in this room?
Andy Cross: Oh yes, both of us.
Gross: I apologize. This was a commodity company. A zinc-based company. It should have been a home run. It really should have. I just said this to you two days ago. I couldn't let it go. The company went bankrupt, and it was on the wall that the bankruptcy was coming. This is like I'm just going to wait until I get even, but I felt if they didn't go bankrupt it was going to be a multibagger. I held on and I held on. The stock was selling at $0.10, and Rich Greifner over at Inside Value was like, "Hello? Are you going to sell?" I was like, "Nope, nope, no." At this point I don't need the $0.10. It's basically zero. I held on until it was in the garbage and there was a complete loss. Extremely painful. We learned a lot of lessons about that. Don't invest in commodity, cyclical type companies that have balance sheet challenges I think is the takeaway there.
Cross: I still have a Lucent Technologies stock certificate that I did not sell. Not very much, obviously, and then it went through all kinds of problems. I had gotten out of a lot of it and held some. A very painful lesson when it comes to platform shifts. [That's what I learned] with Lucent.
Gross: "Do your rules for selling change between tax-deferred and taxable accounts?" For me it does in the sense that I'm more willing to sell a stock that has a large gain if it's in a tax-deferred account because I won't have the tax bite, but I'm not sure that's necessarily a smart investment decision. The investment decision should be based on the merits of the stock going forward.
But sometimes taxes can be factored into that equation [because that is a loss of capital that you can factor in], but it gets a little bit dicey, there, when you're trying to decide whether you like a company for the long term and your taxes come into account.
Cross: For me, probably not a whole lot. There are some investments, if you're looking for other ways to invest that capital [or] when you're going to redeploy that capital that are better in tax-deferred accounts or not tax-deferred accounts. MLPs, for example. Otherwise, I don't think a lot.
To Ron. "How has your investing changed since becoming a Fool? You were a value investor and still are. What tools or ideas have you added or discarded since becoming a Fool?"
Gross: How much time have we got?
Cross: And maybe tailor it toward selling, too.
Gross: I still am a value investor. I believe in valuation tools to help one make an informed investment decision. I always knew that I was notorious for selling a stock too soon, and quite frankly I justified that by saying it just makes me feel better. But I left a lot of money on the table and there are not a lot of multibaggers in my past because of that.
What I have learned to do a little bit -- I haven't taken my value hat off but have just put it askew -- is I've let really strong companies continue to generate returns and reinvest capital at high rates, and over the years I've gotten more comfortable doing that, even if my Excel spreadsheet tells me to be careful.
There is a time when it becomes ridiculous or extremely overvalued where I will cut ties, and valuation is always a part of my process. It's just a little bit less a part of the process than it used to be.
Cross: "Is there a right amount of number of stocks one should have?" I was talking to a few members today about this, especially as we continue to introduce new stocks into our universe. We have a lot of stocks out there that we have active recommendations on.
It's really individual. We want to make sure you're diversified enough to hopefully be able to ride out some of the volatility, although stocks are very correlated these days, so that might not quite work out. When all investors come into Stock Advisor, we want to get them at least up to 15 stocks. Then beyond that it really starts to vary. I think by last count I had almost 60 stocks if you throw in some of my kids' accounts. Some have even more than that and some have fewer.
It is very personal, but I would definitely strive to get at least more than 15 into your account because that hopefully will give you a little bit of ballast.
Gross: There's a question to me. "Is Tesla extremely overvalued or not?" The way I will answer this question is does anybody listen to the radio show Motley Fool Money? We talk about Tesla a lot and the valuation comes up a lot.
Here's the thing. I don't own Tesla. I don't think I will own Tesla. It's not necessarily because it's extremely overvalued or not. It's because I can't tell. And the reason I can't tell is because I don't know what it's going to become. It's not a car company. It's not a battery company. It's an energy company. It's a lot of things. There's a lot of optionality. There's no profits. There will be profits. I just don't know. If I don't know, then it's called gambling to me. So, I choose to stay away.
Tom Gardner believes in Elon Musk. He thinks this guy is amazing and he will turn this into something incredible, and Tom is completely comfortable owning Tesla as a result of that. Two different sides of the same stock. It takes two to make a market.
Cross: "Any suggestions on vehicles for keeping gains extracted for the next three years?" I think that means if you take it out of stocks, what do you put it in? We know how little you're making in your bank accounts today. I don't have any particular suggestions in general about that. The real spirit is you want to be able to access that capital as you need it.
[What you want] -- if you need the capital for any reason you set aside -- [is to] make sure you have enough in savings. Rainy day funds, college expense, house payments; then all of a sudden, the capital is not there. You want to make sure that money is safely stored away in some investment vehicle and not really in something that's as capricious or mercurial as the stock market. It really hasn't been over the past couple of years, but it can be, as we saw a little bit this year, and certainly 10 years ago.
Gross: One of these days CD rates will come up to the point where it's a fine place to put your cash once again. It's just been kind of silly over the last bunch of years whether you get 0.1% or something. One day they'll get back up there, but be careful what you wish for, because that takes its toll somewhere else.
Cross: "What should be considered when deciding to sell holdings vs. incurring debt?"
Our financial planners and Robert Brokamp, who runs our Rule Your Retirement service and works with Ron on Total Income, has lots of advice on this. Any high-expense debt you want to try to pay that off as much as possible. This is just general Motley Fool advice. You want to try to pay that down. If you have equity holdings, that might be another good reason to sell and one we didn't address here, but from a use of capital perspective, that could be a good use of capital, especially if it's expensive credit card debt.
Gross: That's for sure. I personally am OK with mortgage debt relative to selling stocks to pay for a house, as long as mortgage rates stay where they have been over the last decade. To me that's a fine use of debt. My friend Buck, over there, and I have sometimes talked about even taking equity out of our homes and putting that in the market.
Now, that gets a little dicey there, because you're playing games. But when rates were 3% it was hard not to think about. I'll take 3% debt all day long if I can earn 10% in the market. I'm not going to advocate that right now, but I do think mortgage debt, as long as rates remain reasonable, is a fine type of debt.
Cross: Again, this is just general advice from The Motley Fool for not any particular case, but the high-expense debt is something you really want to try and avoid as much as you can and certainly we want to teach our kids that as much as possible. I know it's sometimes hard and tempting to do for kids.