The Compound and Friends - Selling Big Winners (with Josh, Michael and Blair)

Episode Date: March 17, 2019

There you are, sitting on a massive gain in a big winning stock. And now it's become a large portion of your portfolio and your net worth increasingly depends upon that stock staying up. Now what? Diversification will rarely look as attractive in hindsight versus the huge gains that are possible from a big winning stock. And regret minimization is one of the most important strategies in finance given how our behavior affects our long term returns.  In this episode of Live from the Compound, Certified Financial Planner Blair duQuesnay joins Michael Batnick and Josh Brown to discuss regret minimization techniques and how to rationalize selling a big winner.  You can talk to Blair duQuesnay about your own portfolio and financial plan here: https://ritholtzwealth.com/team/blair-duquesnay/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, what's up? It's Josh Brown. We are live from the compound. It's me. It's Michael. It's Blair Ducanet. Blair, you wanted to talk about this idea and we see it everywhere where like it's never been an easier decade to be a self-directed investor or if you've owned the biggest winning stocks, how do you downshift and say, okay, maybe it's time to diversify. Like you're having conversations with people all the time, and they have a lot of Apple. They have a lot of Google. They really haven't had to do anything. And that's like just propelled their portfolios to much bigger numbers.

So now what do you tell people that have had that level of success? Yeah, so if we look at the S&P since the bottom of 2009, it's been very difficult for any diversified strategy to beat the S&P. And do-it-yourself investors tend to buy the large cap U.S. stocks, you know, the big names, specifically the names that they may do business with, the consumer products that they buy. And so this rally has been led not only by U.S. large cap stocks, but also by the names of the companies that we interact with, Apple, Amazon, Facebook, Google. And so it's confirmation bias, right?

So for 10 years... Oh, they say, I have an iPhone, I'm on Facebook, and I've tripled my money in both of those stocks. And obviously I knew that was going to happen. And so now it's difficult to look at a diversified portfolio adding value stocks, which have underperformed, international stocks that have underperformed, international stocks that have underperformed, bonds, oh my god, right? So if you look at the past performance, it doesn't look like that would have been a good idea. So why would I now pay somebody to do something that obviously I was able to do on my own? But I think investors know

when they're thinking about retirement and they know they need a planner, they know they need to hire an advisor. It's such a big decision. I think they intuitively know this isn't going to last forever. Aren't all the bull markets, though, led by really well-known companies? Can you think of a huge bull market where people didn't know the companies? Like GE in the 90s, everyone knew GE. I think that if you measure the bull markets from the bottom, they can be led by like not the sexy names. So think like,

I'm just, maybe this is just availability bias. Did I pass? Yes. But like, think about the value stocks at the bottom in 2002 or three to like 06. Okay. What were they?

Do we even know? I don't know. Who cares? Right. So people don't remember them. Yeah. And I think maybe in, I would say later stages,

you see like the big sort of brand names, but maybe not later stages. Maybe just, I don't know. Right. So people don't remember them. Yeah. And I think maybe in, I would say later stages, you see like the big sort of brand names, but maybe not later stages. Maybe just, I don't know. Right. So if you were to look at like the top 10 winners in the S&P over the last 10 years, most investors would know like eight of them. Like they would know the brand name. Because not only... Maybe Netflix and, right? But actually there's a lot that aren't necessarily like, that would surprise you. Somebody showed me Monster Energy Drink. There's a lot that aren't necessarily like that would surprise you somebody showed me monster energy drink

there's a bunch of those on the list is like thousands and thousands now the ones that drive the return of the indexes obviously are by definition

the giant names they become giant Microsoft Amazon alright so what do you tell people they say why would I

why do I want to own steel mills in North Korea in South Korea or banks in Spain? Is that what you're recommending? No, but I'm saying, why would I want to diversify into that? Look how well I've done with companies that I use their products every day. That's such a hard concept for investors that have only been through one cycle. They don't know any better than these big stocks keep working.

I don't think you can change somebody's mind. If they've done really well over the last eight years with NVIDIA and Netflix and whatever, what can you say to them? But isn't that kind of what we do for a living? I call it the bird in the hand, right? This is great. You got these returns.

Let's take them. We don't know what's going to happen going forward, but what we do know is that diversification is the only free lunch. And when you're thinking about making a decision like stopping work and now living off of all the money that you've saved your entire life, it resonates with people. They realize that they really shouldn't be trying to do it on their own. Well, also, when you're recommending a portfolio approach as opposed to the top 10 stocks approach, they're going to end up owning those stocks anyway.

They just won't own them individually. They'll own them in a fund. Like, do you find that that resonates with people or not really? No. But don't you think when we're talking about these people, doesn't it depend? Always. With some people it does and with some people it doesn't.

So I think it really just depends. The hardest thing, I think, is when somebody has a 10-bagger to get them to think about what happens if you lose half of the gains in this in any given year which could happen with we like we've seen it with stocks like Celgene and Gilead but we're not really talking to people like that I mean I I'm not I don't talk to clients anyway but like are we having people that come to us and they're like hey uh 90% of my portfolio is in Netflix I'm up 17,000% now what do I Maybe not that, but they've owned a few of these winners

and now it's a bigger portion of the portfolio. Like 20%? Right. And there's a lot of nervousness about how to sell because regret, right? I sold and I didn't get out at the top. And I just recommend selling a portion and creating a calendar date

when you're going to sell another portion. And if you want to continue to hold on to a small percentage of it forever, that's okay. How to sell is so hard. I remember like with Barry seven or eight years ago, we would have clients that like 30% of their portfolio was Apple already. And then of course you've got a huge embedded tax liability. You don't want to just sell it for the purpose of diversifying it, but you also don't want to see that grow to 80% of their portfolio. And at the time, it's even pre all the services business that Apple is in. So you're like, it's a consumer electronics company.

What has been the history of holding on to something like that? Well, that's a really good point because the danger is that you get somebody out of Apple or a winning stock and then they just hold a grudge against you forever. Well, that's right. There's no right way to time to sell. Even if you're doing the right thing, people are outcome oriented. Yeah. So, right.

So you could say to somebody, the right thing to do generally is this, and then they do it. But in that specific case, it was the wrong thing. So framing that sell decision. So what's your general rule of thumb? Just know in advance what you're going to do. And that way, whatever's going on in the market doesn't affect it. Go ahead and agree to a calendar-based process for selling. Depending on the size of the investment, do it in thirds or fourths. Is that unsatisfying to tell people

calendar-based as opposed to when it gets to this price, we'll sell X amount? You don't know that it's going to go to this price? But you could say that too. You could say at every 10% move, we're going to take an eighth off or whatever it is on the upside and the downside. And you have specific price levels in mind. Right. It's just the point is it has to be premeditated.

Yeah. You can't make the decision in the moment. You can't be like, oh, Amazon's earnings weren't great. Let's go ahead and take 20% of the position down. Because then you'll end up doing right sometimes, doing wrong sometimes. And the client will look at you like, that's like very inconsistent advice. Right? So what's your big takeaway from just this whole concept?

Like what's the number one thing that people should understand about selling a big winner? It's never going to be easy, but you can't. But I want easy answers, Blair. You can't risk your ability to live the rest of your life off of your portfolio on one name. It's just too big of a risk. No matter how good the name is. Exactly. But what if it's in the cloud? It is just. What if it's software as a service? You got to bring it back down to earth. All right. All right. How's that? It's good. You got to bring it back down. Listen, you heard it here first from Blair Ducanay. She knows her stuff. Michael's pretty smart too. Josh makes it up. I'm just here for how good I look on camera. Let us know what you think. How do you sell a big winner? How do you think about taking an outsized position down in the portfolio we love your comments

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