During major sustained advances in stock prices, which usually occupy from five to seven years of each decade, the investor can complacently hold a list of stocks which are currently unpredictable. He doesn't worry about the top because he knows he is never going to sell at the top. He knows that the chances are overwhelming in favor of the assumption that he will get far better prices by waiting until after the top is passed and a probable reversal in trend can be identified than he will ever get by attempting to anticipate the top, and get out on the nose. In my own experience the largest profits we have ever taken have come from stocks purchased while they were making a new high in a market which was also momentarily expecting the top.
As I have already pointed out the absolute price of a stock is unimportant. It is the direction of the price movement that counts. It is always probable, but never certain, that the direction of the price movement will continue. Soon after it reverses is time enough to sell. You should sell when you wish you had sold sooner, never when you think the top has arrived. That way you will never get the very best price—by hindsight your individual transactions will never look daring. But some of your profits will be large, and your losses should be quite small. That is all that is necessary for a satisfactory, enriching investment performance.
Stock Profits Without Forecasting, by Edgar S. Genstein
We have used this quote a number of times over the decades, as these are two of the most important paragraphs we have encountered in more than 47 years of studying markets. DO NOT read them just once. Go off to a quiet spot that invites contemplation and READ THEM SEVERAL TIMES. Then reflect on all of the mistakes you have made in trading and investing. Bells will ring, and curses will be uttered, if you are truly honest with yourself. Our advice is to keep this quote handy, read it over, and study it every time you get ready to make an important buy or sell decision, especially if your emotions reign.
Obviously, we agree with Mr. Genstein's advice, but over the years have added a "twist" to his sage strategy. That twist has been to be a scale-up seller in select stocks that have appreciated when we think we should raise some cash. This does not mean we sell the entire position if we continue to find the fundamentals to be favorable. Scale selling partial positions accomplishes a number of things. We recommended doing some scale-up selling during the entire month of January 2018 when our short/intermediate proprietary models telegraphed that February was the first potential window of downside vulnerability in a long time. The reasons to raise some cash were fairly simple.
Firstly, it allows capital gains to accrue to the portfolio (sometimes long-term capital gains and sometimes not). Secondly, it rebalances said stock positions back toward the original portfolio weighting intended. Thirdly, it tends to give us the “margin of safety” mentioned in Benjamin Graham's book The Intelligent Investor. To wit, this strategy allows us to hold some of our original investment positions until we “wish I would have sold them sooner.”