The Big Three: Buy, Sell, Hold

We have explored in this series a number of foundational concepts, each building upon another and yet inextricably linked together. We have discussed portfolio sizing, portfolio positioning, mark-to-market (MTM), time and timing.  Each leads to three decisions: buy, sell, hold.

1. Buy - should I open or add to a position?

2. Sell - should I close or trim a position?

3. Hold - should I do nothing with regard to a position?

Each decision, buy-sell-hold, should be viewed in context to portfolio size, position, MTM, time and timing.

Buy: related questions - should I buy now?

• Do I believe that in the future, the fair value of the asset will trade at a higher price? 

• Will it be higher in value in 6 months? 12 months? 24 months? Why?

• Am I subject to MTM tax treatment?

• Am I at my percent allocation target (size) for this asset class or individual asset if it appreciates 10%?

• How long do I plan to hold this asset?  

Sell: related questions - should I sell now?

• Do I believe that in the future, the fair value of the asset will trade at a lower price? 

• Will it be lower in value in 6 months? 12 months? 24 months? Why?

• Am I subject to MTM tax treatment?

• Am I at my percent allocation target (size) for this asset class or individual asset if I sell it?

• How long do I plan to be out of this asset?  

• What happens if I am wrong and the asset appreciates instead of depreciating in value?

Hold: related questions - should I hold?

• Has anything happened to negatively impact this asset class and asset instance?

• Am I clear about how much I am willing to lose in a drawdown?

• Am I clear about how much I expect to gain?

• Will I regret not taking action more than losing some or all of my gains or if circumstances dictate, losing more capital? 

I believe reminding myself of these questions when making the three most important decisions each trading day (i.e., buy, sell or hold) will improve my results.  However, I also believe the following takeaways and open questions should be weighed alongside:

1. I can minimize capital exposed through smart options contracts to achieve the buy/sell decisions while maintaining long equity positions

2. I can’t control what will happen to the market sentiment and money flows of a given asset class or asset.

3. I can’t be sure that the market will behave like I think it will (e.g., it goes up when I thought it would go down and vice versa).

4. What is happening to the asset with regard to money flows and market sentiment?

5. What is the risk being taken with the open positions?  What is the risk of missing out?

6. What is the hurdle rate?

I will continue to explore, research and answer these takeaway questions in future editions of this blog.