Why Selling Positions Should be Welcomed by You and Your Client

Thursday, June 6th, 2013

Why Sell­ing Posi­tions Should be Wel­comed by You and Your Client

By Brian Liv­ingston, Gen­eral Man­ager of SIACharts

One of the hard­est issues that an advi­sor has to face when mak­ing invest­ment selec­tions for their clients is to decide when it is time to exit a posi­tion. More often than we care to admit, it is the lack of being able to men­tally accept sell­ing a posi­tion that does the most dam­age to a port­fo­lio. Whether it is ego by being unwill­ing to admit that we were wrong, afraid of the forth­com­ing con­ver­sa­tion with your clients, per­haps you have no sell dis­ci­pline, or maybe there is that nag­ging feel­ing in the back of your mind that keeps say­ing “but what hap­pens if it turns around tomor­row?” What­ever that rea­son may be, and only you can truly know which rea­sons they are, being able to sell a posi­tion in a con­sis­tent rules based fash­ion is one of the most impor­tant things that you the advi­sor will ever do for a client.

(Some of the most suc­cess­ful investors in the world are more often wrong than they are right with their stock picks. How­ever, the dif­fer­ence that sep­a­rates these investors is they are able to min­i­mize their losses on their wrong picks by get­ting out of posi­tions quickly admit­ting that pick didn’t work and also stay in their win­ning picks for long peri­ods of time.)

At SIACharts, we use a rel­a­tive strength based approach to help our advi­sors deter­mine from a macro to micro basis where they should be best plac­ing their client’s assets. We define rel­a­tive strength as “a tech­nique that com­pares the per­for­mance of an asset class or hold­ing against other asset classes or holding(s).” Rel­a­tive Strength cal­cu­lates which invest­ments are the strongest rel­a­tive per­form­ers by com­par­ing each asset class or hold­ing against the other avail­able choices. Rel­a­tive strength between asset classes gives us insight into money flow on a large scale. By under­stand­ing where money flows are mov­ing, we can assess Risk vs. Reward for any asset class, sec­tor, or group of invest­ments. SIA’s data­base includes over 60,000 stocks, ETFs, Cana­dian and U.S. mutual funds, com­modi­ties, cur­ren­cies, etc. which are ana­lyzed daily to help under­stand these money flows.

With being able to see where the cur­rent strength lies, by default we also know where the cur­rent weak­ness is. Advi­sors are then able to exit posi­tions as they start to exhibit this rel­a­tive weak­ness and as a result they are capa­ble of mit­i­gat­ing the dam­age before it poten­tially blows up the port­fo­lio. As an advi­sor, you must be capa­ble of get­ting beyond your per­sonal biases and real­ize that the abil­ity to sell posi­tions is a healthy thing to do for a port­fo­lio. Do not get mar­ried to a posi­tion. A true self-analysis will likely show that the most dam­age you have done to your client was your unwill­ing­ness to sell. By sell­ing weak­ness and stay­ing in strength, our advi­sors have been able to suc­cess­fully see a reduc­tion in draw­down for their port­fo­lios help­ing to improve their per­for­mance. Com­bin­ing risk reduc­tion and improved per­for­mance with a defined rules-based approach has also helped our advi­sors gain an advan­tage in gath­er­ing new assets.

Let’s look at an example:

A typ­i­cal Cana­dian advi­sor is usu­ally over-weighted in Pre­cious Met­als, Energy, and Banks because that is what has worked for them his­tor­i­cally and where a large part of the Cana­dian indus­try is focused. But with rel­a­tive strength, we can help iden­tify when we should be trad­ing these sec­tors and when we should stay away from them. With the recent drop in Gold and Sil­ver, let’s look back and see if we can find any rel­a­tive weak­ness that may have hinted at an exit point that would have pre­vented the nasty hit those Com­modi­ties took that were pos­si­bly in your port­fo­lios, from a macro to a micro level.

MACRO Out­look

In the SIA Asset Allo­ca­tion Model, Com­modi­ties were our top ranked asset class for part of 2011 and they moved down to the very bot­tom of our rank­ings at the end of Sep­tem­ber of that year and stay­ing at the bot­tom ever since then. So from a macro asset class com­par­i­son, Com­modi­ties have been the weak­est asset class that an advi­sor could have been in for the last 20 months.

From a sec­tor com­par­i­son, at SIA we rank 31 dif­fer­ent sec­tors each night to once again show you where the strength and the weak­ness may be within the North Amer­i­can mar­ket. The chart below is what we call a Rel­a­tive Strength matrix posi­tion chart, and in this case, we are look­ing at the Met­als and Min­ing sec­tor. On May 11, 2011, the Met­als and Min­ing sec­tor moved from the Favored zone (the strongest sec­tors) into the Neu­tral zone and soon after into the Unfa­vored zone (weak­est sec­tors). This was the indi­ca­tion of weak­ness against the other sec­tors that our advi­sors would be see­ing that would be telling them they needed to be exit­ing out of that sec­tor and mov­ing into some­thing stronger. We can see this sec­tor con­tin­ued to move down to the bot­tom of the rank­ings where it has stayed for over a year and a half.

The next screen cap below shows the bot­tom ranked weak­ness right now in our sec­tor analy­sis com­par­isons. Bank­ing, Energy, and Met­als and Min­ing are all down in the bot­tom 5. How much bet­ter off would your client’s port­fo­lios be right now if you had sold out of that weak­ness and returned that cap­i­tal back into some­thing that is stronger and healthier?

MICRO Level

Look­ing at it now from an indi­vid­ual prospec­tive, back on April 8, 2013, SIA did an analy­sis on Eldo­rado Gold (ELD​.TO) show­ing roughly where the posi­tion was stopped out and how it had moved sub­se­quently. As you can see below, by hav­ing the will­ing­ness to sell this stock and move on to a new posi­tion that was rel­a­tively stronger, this would have saved an approx­i­mate 40% drop (as of the time of writ­ing this arti­cle ELD​.TO is up approx­i­mately 1.5% since April 8, 2013).

Per­for­mance is a great thing to have, but the abil­ity to not lose money for your clients is just as impor­tant or even more impor­tant. Being proac­tive in your approach to sell­ing posi­tions when nec­es­sary should help you min­i­mize losses, improve returns, and most impor­tantly increase the con­fi­dence that your clients have in you.

Copy­right © SIACharts​.com

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Tags: Asset Class, Asset Classes, Asset Insight, Assets, Brian Livingston, Choices, Consistent Rules, Discipline, Ego, Fashion, Important Things, Insight, Investments, Investors, Large Scale, Long Periods Of Time, Losses, Money Flow, Money Flows, Relative Strength, Risk
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Four Lessons from the Barron’s Winner’s Circle Conference

Saturday, August 28th, 2010

For the past two years, I have been a reg­u­lar con­trib­u­tor to Hors​es​mouth​.com, the lead­ing prac­tice man­age­ment web­site for U.S. finan­cial advisors.

In late March, I read a col­umn in Hors­es­mouth by Debra Tay­lor, a New Jer­sey finan­cial advi­sor who wrote about four lessons from a con­fer­ence in Palm Beach spon­sored by Barron’s that she had recently attended.

While writ­ten almost six months ago, these four lessons are just as rel­e­vant today and I reprinted them with her permission.

For sev­eral days, Barron’s Top 100 Women Finan­cial Advi­sors in Amer­ica (and another 400 women advi­sors who attended by invi­ta­tion only) dis­cussed their prac­tice man­age­ment ideas, invest­ment philoso­phies, and what has worked and not worked for them dur­ing the past year.

The Top 100 women all had min­i­mum assets of $250 mil­lion each (and most had much more), and many of them had over­come addi­tional road­blocks on their way to the top.

Les­son One: The need to val­i­date your process

The first les­son was that no sin­gle asset will save the day.

One of the com­mon themes of the con­fer­ence was that every asset class courts risk: oppor­tu­nity risk, credit risk, mar­ket risk, and so on. There­fore, although bonds may have saved 2009, when infla­tion kicks in, this approach will catch up with you.

Every invest­ment rec­om­men­da­tion should serve mul­ti­ple purposes-for exam­ple, dol­lar hedge and infla­tion pro­tec­tion. In addi­tion, advi­sors should always be con­cerned about down­side and stress-test everything.

Par­tic­i­pants were also urged to think care­fully about the sources of infor­ma­tion they relied on.

Some clients want to know that they can rely on your rec­om­men­da­tions, so they need to con­firm your research process.

Debra Tay­lor wrote that she is being asked this ques­tion more than ever before, and comes pre­pared to every meet­ing with her research binder and other exam­ples of her invest­ment process and performance.

Les­son Two: The need to tighten your ship

A sec­ond mes­sage from the con­fer­ence that Debra Tay­lor wrote about was that every­one on an advisor’s team needs to oper­ate as a unit and be orga­nized, just as they would be in the military.

Over and over, advi­sors heard from top pro­duc­ers that they should fire bor­der­line staff and keep only the A play­ers. As hard as this may be, it is a recur­ring theme of these top producers.

These top pro­duc­ers all shared sto­ries of revolving-door turnover, new hires that didn’t make it through the day, and so forth. Through­out the indus­try, advi­sors find it hard to hire qual­ity peo­ple who are truly pas­sion­ate about their jobs.

Of course, to main­tain and moti­vate the A play­ers, advi­sors should com­pen­sate well and con­tinue using incen­tive bonuses.

And top advi­sors often reit­er­ated the need for uni­form sys­tems and morn­ing meet­ings (or “huddles”.)

One ongo­ing theme of top advi­sors with large teams was to have a chief of staff or chief oper­at­ing offi­cer on your team to man­age the troops and keep the team on tar­get and account­able. More and more, Debra Tay­lor talked about see­ing that higher-producing advi­sors have a COO so that the advi­sor can focus on client rela­tion­ships and sales.

Les­son Three: Focus on the client experience

Char­lie John­ston, Pres­i­dent and CEO of Mor­gan Stan­ley Smith Bar­ney, dis­cussed the evo­lu­tion of the finan­cial advi­sory busi­ness and high­lighted the need to strive for invest­ment excel­lence, which he believes is becom­ing crit­i­cal again.

He also dis­cussed the impor­tance of the client expe­ri­ence, and focused on the client dis­cov­ery process, list­ing sev­eral key ques­tions as critical:

1. What does money mean to you?
2. What do you try to teach your chil­dren (or grand­chil­dren) about money?
3. If you could give just one thing to your chil­dren, what would it be?
4. What are the val­ues you hold most dear?
5. If you could live your life over again, what would you do differently?
6. Of all the gifts of your time and money that you have given to char­ity in the past years, which was the most mean­ing­ful to you?
7. If your doc­tor gave you 24 hours to live, what would be your biggest regret?

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Tags: 100 Women, Asset Class, Class Courts, Credit Risk, Debra Taylor, Financial Advisors, Horsesmouth, Inflation Protection, Investment Philosophies, Investment Recommendation, Management Website, Market Risk, Palm Beach, Practice Management Ideas, Risk Credit, Risk Market, Risk Opportunity, Roadblocks, Stress Test, Target
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Expert Evidence to Address Fears About Stocks

Wednesday, February 3rd, 2010

Even with the recov­ery in the last nine months of 2009, many clients are still anx­ious about own­ing stocks.

If you’re run­ning into ner­vous clients, you might want to refer to a recent inter­view with Jeremy Siegel, the Whar­ton aca­d­e­mic who’s the lead­ing author­ity on long term asset class returns.

A link to the full inter­view is below.  Among the key points Siegel makes:

• Stocks today are fairly val­ued based on cur­rent earn­ings – and over the next year will likely offer bet­ter returns than bonds and cash
• Why stocks are likely to be sig­nif­i­cantly higher by 2012
• Infla­tion is not going to be a con­cern in the near to mid term
• The rea­son US deficit spend­ing isn’t the biggest cause for con­cern going forward
• Why the last ten years have been so mis­er­able for stocks – and the rea­son that investors can expect after infla­tion returns of 6 to 7% on stocks going forward

Here’s the full arti­cle: http://​knowl​edge​.whar​ton​.upenn​.edu/​a​r​t​i​c​l​e​.​c​f​m​?​a​r​t​i​c​l​e​i​d​=​2​411

And for clients who’d like to watch Jeremy Siegel talk about his views, below are five short video inter­views he did last Sep­tem­ber that you can email to clients.

Stocks for the long run and long term returns http://​www​.cli​entin​sights​.ca/​v​i​d​e​o​/​s​t​o​c​k​s​-​f​o​r​-​t​h​e​-​l​o​n​g​-​r​u​n​-​a​n​d​-​l​o​n​g​-​t​e​r​m​-​r​e​t​u​r​n​s​/​t​y​p​e​:​i​n​v​e​s​tor

The growth trap and the role of div­i­dends       http://​www​.cli​entin​sights​.ca/​v​i​d​e​o​/​t​h​e​-​g​r​o​w​t​h​-​t​r​a​p​-​a​n​d​-​t​h​e​-​r​o​l​e​-​o​f​-​d​i​v​i​d​e​n​d​s​/​t​y​p​e​:​i​n​v​e​s​tor

Look­ing back on the past ten years in mar­kets – what went wrong http://​www​.cli​entin​sights​.ca/​v​i​d​e​o​/​l​o​o​k​i​n​g​-​b​a​c​k​-​o​n​-​t​h​e​-​p​a​s​t​-​t​e​n​-​y​e​a​r​s​-​i​n​-​m​a​r​k​e​t​s​-​w​h​a​t​-​w​e​n​t​-​w​r​o​n​g​/​t​y​p​e​:​i​n​v​e​s​tor

Today’s val­u­a­tion lev­els and mar­ket out­look   http://​www​.cli​entin​sights​.ca/​v​i​d​e​o​/​t​o​d​a​y​-​s​-​v​a​l​u​a​t​i​o​n​-​l​e​v​e​l​s​-​a​n​d​-​m​a​r​k​e​t​-​o​u​t​l​o​o​k​/​t​y​p​e​:​i​n​v​e​s​tor

The case for inter­na­tional invest­ing       http://​www​.cli​entin​sights​.ca/​v​i​d​e​o​/​t​h​e​-​c​a​s​e​-​f​o​r​-​i​n​t​e​r​n​a​t​i​o​n​a​l​-​i​n​v​e​s​t​i​n​g​/​t​y​p​e​:​i​n​v​e​s​tor

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Tags: Asset Class, Bonds, Deficit Spending, Dividends, Earnings, Expert Evidence, Fears, Inflation, Jeremy Siegel, Last September, Last Ten Years, Leading Authority, Market Outlook, Nine Months, Stocks, Term Asset, Upenn, Valuation Levels, Video Interviews, Wharton
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