Selling decision (math)

[Aurelius]

Hi all,

 

This is my first post of many I hope. I'd like to ask a question about a sell decision. I realize a lot of people struggle with selling.

To simplify I would like to set up a few assumptions.

 

Assumptions:

Initial investment: $10K

I own GM. My gain thus far is 60%. I believe fair value to be $55. Upside from here is 54%

I am considering selling and buying Fiat. Fiats fair value is 18. Upside is 83%

Selling costs me 40% in taxes. Assume no transaction costs.

Both will take the same time to reach fair value.

Same downside risk.

 

Solution:

If I keep GM:

16.000*1.54 = $24.640

Profit: 24.640 less 10.000 (initial investment) less 5.856 (40% taxes) = $8.784

 

If I sell GM; pay taxes and invest the proceeds in Fiat:

13.600 (GM sale proceeds) *1.83 = $24.888

Profit: 24.888 less 13.600 less 4.515 = 6.773 + 3.600 (GM profit) = $10.373

 

 

I realize I've simplified a difficult subject. But given my assumptions are right, did I arrive at the right result? That is, I should sell GM and buy Fiat if I care about maximizing profits?

[Yours Truly]

How long do you think it'll take each to reach their 'fair value'? Perhaps that should be factored in as well

[racemize]

How long do you think it'll take each to reach their 'fair value'? Perhaps that should be factored in as well

 

yes, plus the tax-deferred liability gives you extra compounding in the held position--only really a factor if the holding period is pretty long though.

[Kraven]

Why not just own both?  If you don't know - and I would posit that it is not possible to be completely sure - then just own both.  Don't confuse what a number is for what it means or represents.  Just because you come up with an idea of what fair value is doesn't mean you are necessarily right.  If you had conviction then the answer to your question is obvious and you know what it is - you'd buy Fiat.  But you're not certain which is why you're asking.  You want someone to tell you that Fiat is much better than GM and you'd be silly not to do it.  Anyone who gives you absolute answers in a case like this also doesn't know of what they speak. 

[ERICOPOLY]

Selling costs me 40% in taxes.

 

A US taxpayer should take a look at "constructive sale".

 

Sometimes it proves useful.

 

[Ham Hockers]

I own GM. My gain thus far is 60%. I believe fair value to be $55. Upside from here is 54%

I am considering selling and buying Fiat. Fiats fair value is 18. Upside is 83%

 

Any thought about the relative likelihoods of these outcomes?

[SmallCap]

I didn't want to start a new thread but I would value someone clearing up my thinking or just telling me how stupid I am.

 

I have a position in a small cap of originally 100K shares now down to 50K. I have been selling for the last few months as the price has risen dramatically over the last year. I still have faith in the company but just don't feel that it has much margin of safety due to tripling in the last year.

 

Anyway 2 weeks ago I sold another 10K of shares when the price hit $2.25, The price has now dropped to $1.90 and I am tempted to buy 10K back at current price for the psychological boost of having made a short term trading profit.

 

This is in an IRA account so no tax implications.

 

My question is this. is it stupid to try to trade in this way and make my decisions based on movement in share price?

 

[Aurelius]

How long do you think it'll take each to reach their 'fair value'? Perhaps that should be factored in as well

 

yes, plus the tax-deferred liability gives you extra compounding in the held position--only really a factor if the holding period is pretty long though.

 

Isn't that accounted for if assumptions on fair value are correct; and both will take same amount of time to reach fair value; and I choose to sell when fairly value?

[racemize]

How long do you think it'll take each to reach their 'fair value'? Perhaps that should be factored in as well

 

yes, plus the tax-deferred liability gives you extra compounding in the held position--only really a factor if the holding period is pretty long though.

 

Isn't that accounted for if assumptions on fair value are correct; and both will take same amount of time to reach fair value; and I choose to sell when fairly value?

 

It does if you included both taxable events (the net after tax results) for the Fiat version.  It looks like you did.

[Aurelius]

Why not just own both?  If you don't know - and I would posit that it is not possible to be completely sure - then just own both.  Don't confuse what a number is for what it means or represents.  Just because you come up with an idea of what fair value is doesn't mean you are necessarily right.  If you had conviction then the answer to your question is obvious and you know what it is - you'd buy Fiat.  But you're not certain which is why you're asking.  You want someone to tell you that Fiat is much better than GM and you'd be silly not to do it.  Anyone who gives you absolute answers in a case like this also doesn't know of what they speak. 

 

I agree. You are right I don't know what fair values are for GM nor Fiat. I just wanted to make sure I knew how to come to the right decision assuming my assumptions were right. I've been thinking of adding Fiat to my portfolio by possibly selling some of my GM holding. I'm unsure of how big a portion of automobiles I want to be exposed to. But I like the idea of being more diversify in my "autos". 40% tax rates is a bit of a action killer though!

 

I've been lurking a little these last weeks. Although I can't say I understand exactly how your style is. My impression is you focus on things that are cheap while being very diversified. You also seem to be humble and have good common sense. I really like your style and hope to learn from you as time goes by.

[Kraven]

Why not just own both?  If you don't know - and I would posit that it is not possible to be completely sure - then just own both.  Don't confuse what a number is for what it means or represents.  Just because you come up with an idea of what fair value is doesn't mean you are necessarily right.  If you had conviction then the answer to your question is obvious and you know what it is - you'd buy Fiat.  But you're not certain which is why you're asking.  You want someone to tell you that Fiat is much better than GM and you'd be silly not to do it.  Anyone who gives you absolute answers in a case like this also doesn't know of what they speak. 

 

I agree. You are right I don't know what fair values are for GM nor Fiat. I just wanted to make sure I knew how to come to the right decision assuming my assumptions were right. I've been thinking of adding Fiat to my portfolio by possibly by selling a some of my GM holding. I'm unsure of how big a portion of automobiles I want to be exposed to. But I like the idea of being more diversify in my "autos". 40% tax rates is a bit of a action killer though!

 

I've been lurking a little these last weeks. Although I can't say I understand exactly how your style is. My impression is you focus on things that are cheap while being very diversified. You also seem to be humble and have good common sense. I really like your style and hope to learn from you as time goes by.

 

If you think you have a good sense of what the values are for GM and Fiat then of course if you can make more money with Fiat then you should do that.  You have to keep in mind the taxes though as you said.  If the $100 you get from selling GM is all of a sudden $60 then that will impact your decision I would think. 

 

Be careful thinking of investments in absolutes.  When reading an investing story it's easy to applaud our investing hero who sells the obviously more expensive stock to buy the cheaper name.  It always works out beautifully too.  They sold cheapish to buy cheaper and what do you know it worked out great.  In real life it's not so clear.  Which is cheaper GM or Fiat?  It's often stated as obvious that Fiat or some other name is "dirt cheap" and people will add when it falls 1.3%.  If one knew with certainty than that's all they would buy.  Smarter people than me may know these things, but I do not. 

 

If I thought both GM and Fiat were cheap, I'd just buy them both and forget about it.  I wouldn't obsess about what they do day to day.  It would just be another couple positions to me.  Remember the name of the game is making money not creating the investing equivalent of the Mona Lisa. 

 

As you hang around the board more you will get a sense of who the good posters are and who they aren't.  There are a lot of very smart, experienced people here.   

[Tim Eriksen]

I didn't want to start a new thread but I would value someone clearing up my thinking or just telling me how stupid I am.

 

I have a position in a small cap of originally 100K shares now down to 50K. I have been selling for the last few months as the price has risen dramatically over the last year. I still have faith in the company but just don't feel that it has much margin of safety due to tripling in the last year.

 

Anyway 2 weeks ago I sold another 10K of shares when the price hit $2.25, The price has now dropped to $1.90 and I am tempted to buy 10K back at current price for the psychological boost of having made a short term trading profit.

 

This is in an IRA account so no tax implications.

 

My question is this. is it stupid to try to trade in this way and make my decisions based on movement in share price?

 

You already made the short term trading profit.  Buying shares back at a lower price doesn't achieve that.  In other words, any psychological boost should have already occurred or you may be thinking about things incorrectly. 

 

[gg]

I didn't want to start a new thread but I would value someone clearing up my thinking or just telling me how stupid I am.

 

I have a position in a small cap of originally 100K shares now down to 50K. I have been selling for the last few months as the price has risen dramatically over the last year. I still have faith in the company but just don't feel that it has much margin of safety due to tripling in the last year.

 

Anyway 2 weeks ago I sold another 10K of shares when the price hit $2.25, The price has now dropped to $1.90 and I am tempted to buy 10K back at current price for the psychological boost of having made a short term trading profit.

 

This is in an IRA account so no tax implications.

 

My question is this. is it stupid to try to trade in this way and make my decisions based on movement in share price?

 

You already made the short term trading profit.  Buying shares back at a lower price doesn't achieve that.  In other words, any psychological boost should have already occurred or you may be thinking about things incorrectly.

 

Agree with Tim. Just want to add if its a really small, small-cap, I'd consider it more akin to being a market maker, and providing liquidity, than a true trading profit. And there is certainly money to be made in that strategy, but you need lots of patience and willingness to hold those securities for a long while

[dpetrescu]

Regarding GM, I would just keep it simple. We know for sure there will be another recession sometime in a few years. On average there is a recession every 7 years so we are not that far away. All the economists will be shocked but we will not be surprised. Just hold on to GM through this next recession, just make sure you have enough cash on the sidelines to buy more when it will be down 30%. Hold on to it for another 10 years.