Time to Sell Stocks and Take Profits?

Hey guys, welcome back to the channel. In the last video, we were talking all about how expensive the market has gotten based on the turnaround that we've seen the last few months, and actually how far detached the market is from the economic reality that we're in. This brought up a fair question from a lot of people, and the question is: Should we be selling our stocks?

If we can quite clearly see that the market is becoming so far detached from the economic reality that we're in, should we just sell and see if the market falls off in the next few months, and then get back in at a fairer value? I found this a really interesting question because there are some situations where I would say, "No, of course not, you shouldn't sell your stocks." But there are other situations where I was like, "Actually, if I was in that situation, I probably would sell my stocks."

So let's talk about those different situations and whether or not we should be selling based on the market being extremely overvalued and becoming detached from that economic reality that we're currently in.

As I kind of alluded to in most situations, should you sell your stocks because the market is really overvalued? In most situations, I would say no. The primary reason I say that is because we don't know where the market is going to go in the short term; it could go up, down, or sideways. We don't actually know which way the market is going to go, and if we are long-term investors, then what happens in the next week, the next month, or the next three months doesn't really matter.

If we're going to be holding for the next 30 years, what happens in the short term really doesn't faze us. A lot of people say, "You know, the market's really hot, really expensive at the moment, so I'll probably just sell now and wait a couple of months until the market cools off a little bit,” and then I'll buy back in when it's a little bit fairer. That reasoning does make sense, but the problem with it is, as I was saying, we just don't know what's going to happen in the short term when it comes to the stock market.

For instance, if you look in Australia, but particularly in America, the stock market has been overvalued for years; it's been overvalued for quite a long time now. But that didn't stop the market itself from just going up and up and becoming even more overvalued. Overall, if you're trying to sell out of your stocks now and kind of just wait for the market to cool off and bring the share prices back down, then in my opinion, you're not really investing; you're speculating. You're trying to time the market.

Okay, Brandon, but what if I'm purely a passive investor and say I only hold market-tracking ETFs in my portfolio, where literally the movements of the stock market in general are directly correlated to the success or failure of my stock portfolio? Shouldn't I be trying to sell my portfolio when the market in general is really, really high and has become detached from reality? Like, that's how high it's gone. Well, yes and no.

If you put it like this: If I was 64 and I was seeing this market just go straight up into overvalued territory, then I would be thinking, "You know what? I am going to take this opportunity and I'm going to sell because the market is unbelievably overvalued versus historical valuation measures."

So if I was 64 and I was gonna retire next year, and you know my retirement depends, it correlates directly on what happens in the stock market, then I'm definitely thinking, "You know, I'm going to take this opportunity to sell at really higher valuations, and I'm gonna set myself up for my retirement."

However, for most of us, okay, we have many, many years before we are going to retire. Right? I know I've got like, how many years? 40 or so! 40 years until I'm ready to retire. Overall, if you're a passive investor, you have to remember that you're not in it for one or two years, right? The idea of passive investing is to build wealth for your retirement 10, 20, 30 years from now.

So if I subscribe to that strategy, I'm just thinking, "You know, I'm just gonna keep showing up." And that's what dollar-cost averaging is all about. No matter what the market does, if it goes up, down, or sideways, we just keep showing up. In the short term, it doesn't matter. We simply don't care about what happens in the short term.

The most important thing for passive investors is they just keep showing up, and they just keep doing that year after year, decade after decade. Until eventually, they're getting ready to retire, they look back on their investing career and they say, "Well, look at the stock market. It's had some turbulent times, but overall, it's gone up in the long run, and I am thankful that I have invested every six months or so, and I have gotten the average return over time.”

So generally speaking, when it comes to passive investing, I'm definitely more in the camp of hold as opposed to sell and try and time the market. To me, I'm just really not a fan of timing the market.

However, if you're someone that's like 64, getting ready to retire, then for sure, I mean you want to take advantage of the fact that you're about to retire, and you want to take advantage of the fact that the market is really high. But what about if you don't really subscribe to passive investing? What about if you're a stock picker?

Alright, if you like backing individual companies, you know, I'm invested in a couple of really fantastic businesses that I seriously believe in for the next 10 to 15 years. I think they're great. However, because of what the market's doing at the moment, their stocks, when I run discounted cash flow, when I run owner’s earnings, turn out they're like double the fair value. Their stocks trade at double, or triple, or quadruple the fair value.

Well, that's a bit of a pickle, but ultimately when I think about selling, selling individual businesses or individual investments that I've made, selling comes down to two criteria. Number one: You sell if the investment you've made is no longer wonderful. If you made an investment and then the management team or the company or whatever has changed in a way that means the company is no longer a great company, then I just, I just cut it. Okay? You've got to sell. You can't stick around with crappy companies.

But the other criteria where you would consider selling is if your investment has become so overvalued that you look at where the price is now. Even if the company achieves really good growth like what you're expecting for the next ten years, then the share price now is still like higher than what you think it could potentially get to in that amazing growth story. So if you see that, then obviously you probably do want to sell, because you don’t see there being much movement upwards in the share price even if the company can execute on this fantastic growth strategy that you believe in.

Now, if you find yourself in that situation where you're looking at this great company that you want to stay invested in for ten years but the price has gone so high that you look at the next 10 years, right? Man, it's fairly valued now. If it completes like 10-15 percent growth each year for the next ten years, if that's the case, then that's a harder situation to be in.

I definitely wouldn't say, "Oh, you've made a terrible decision," to anyone that decided to sell in that situation. The question here is how overvalued do you let your investment get to before you decide to sell it? That's the question, and unfortunately, no clear-cut answer for this one. You could be someone that feels comfortable selling after it's overvalued by 30%. You could be someone that will decide to sell if it's 100% overvalued.

You might be someone like Warren Buffett. Warren Buffett's approach is more like, you know, even if it goes really overvalued, I probably still wouldn't sell it. I'd still hold it through, even if it's extremely overvalued. If it's a great business, I'm just gonna stick with it. For someone like Warren Buffett, he used to be less like that, however, now just because of his size and the size of his portfolio, the size of his positions, he's very much just like, "It's a great business. I'm just gonna keep holding it. And I'll buy if the stock goes down, but I'm not gonna think about selling if the stock goes really high."

Now for us, most of us, we are the little guys, right? We aren't the Warren Buffetts of the world, and we are trying to snowball our money as quickly as we possibly can. In order to do that, I definitely don't hesitate to take a big profit if I'm staring it right in the face. Like if a stock that I'm holding is really expensive, really overvalued, and I could realize, again, it's sitting there right in front of me.

I used to say to myself, "No, you know, I'll keep holding and holding and holding." But what I found over time is that I've had a lot of situations where I was staring a really big profit straight in the face, and I said, "You know what? I'm just gonna keep holding." Before you know it, the stock goes back down to roughly fair value, and that profit has just escaped.

So I think that's kind of having some of those experiences has made me more comfortable with the idea of if you see a profit sitting there, then just take it. Now, I wouldn't take a profit unless the stock or the investment I was looking at was very overvalued. So if I'm looking at a massive profit and it's only fairly valued, then I'm totally not going to touch it. I'm going to stay invested because I do believe in these companies for the next 10 to 15 years.

But if a stock is getting really pricey and I'm just staring at a big unrealized gain, then I want to realize it. I want to make that profit mine, so I definitely don't hesitate in clearing those profits. Taking those profits now does present a bit of a conundrum, because some people are of the opinion where they see the profit, and they want to take it, and then they've just sold the shares in that company they believed in for the next ten years.

There's the other people that see the profit, decide not to take it, because they want to hold this stock for the next ten years. I'm not saying which one's right or wrong, but one of the interesting strategies that I've heard about over time, something that people do to kind of escape this quandary, is that if they see a big, big profit staring them in the face, but they want to stay invested in this company for a very long period of time, then instead of selling out of their position completely, they just sell to get their initial stake off the table.

Right? So if they sunk ten thousand dollars into a stock and it's gone up to 20, then they'll clear their ten thousand; they'll take back the money that was actually theirs. And then if you do that, that kind of makes you feel a little bit freer with your investment, because essentially you're just playing with house money at that point.

So overall, these are some of my thoughts as to whether or not I sell when the market is really overvalued. If you're a passive investor and you're dollar-cost averaging—like that's what I do with my passive investing—then there's no market condition that would make me sell my ETFs because I want to hold them for 40 years. Because that's my long-term, you know, investing strategy that's going to build me wealth over a very long period of time.

I'll buy stocks if the market goes really undervalued; I'll take advantage then. But if the market is overvalued, I'm not going to sell out and try and start timing the market. However, when it comes to the active investing stuff, the individual stock selection, then even still, these days I lean more on the side of just sticking in there and being invested for the long term with these great companies.

However, I certainly don't shy away from taking profits if it's staring me right in the face, and the stock is also really, really overvalued. As I say, if it's just fairly valued and I'm staring at a profit, then I'm totally gonna stay invested because I do believe in that company for the long term.

But anyway, this is obviously like there's no clear-cut right or wrong answers here. This is kind of what I've come to as answers looking at my strategy. So I'd love to hear from you guys! Let me know down in the comment section below: What do you feel? What do you think about selling when the market's higher, when your stock is overvalued? Do you do it or do you just back the company in because you want to stay invested with them for 10, 20 years? I'd love to hear that.

We're gonna get a lot of differing opinions, I feel, in the comments section. So have your say, leave that stuff down in the comment section, let's keep the discussion going. I'll be answering comments, so definitely leave a comment down below. And that'll do me for today, guys.

Of course, if you wanted to learn how I go about passive investing or active investing, whichever strategy you like more—stock picking or ETF-style investing—then check out the profitable links in the description. We've got two courses up there at the moment that detail, there's a course for each one of those strategies. So if you're interested, definitely check it out and get onboard.

But that'll do me for today, guys. Thanks very much for watching, and I'll see you guys in the next video. [Music] [Music] [Music]