The One Simple Reason You Shouldn’t Sell a Stock That is Overperforming

How to rebalance a portfolio without losing the momentum euphoria

When stock prices are rising, it’s called “momentum investing”; when they are falling it’s called “panic.”- Paul Krugman

In a recent CNBC interview about Tesla, Chamath Palihapitiya says: “I don’t understand why people are so focused on selling things that work.” after being asked if he was in a selling position about Tesla stock.

As I was listening to the interview, I remembered some of the principles Howard Marks mentioned in his book “Mastering the cycles- getting the odds on your side.”

It was one of the first books that gave me a perspective about a long-term investment. I was starting my investment journey. So, reading a long-time successful investor was like being born into a new world.

In these disruptive times, you keep listening to great investors like Warren Buffett, Howard Marks, Ray Dalio, or Paul Tudor Jones, saying they can’t understand the present time. They warn us about the danger of a tech bobble, an ETF bobble, and a bond bobble — even the end of a great debt cycle.

If you are a beginner in the world of stock markets, I believe you’re having a hard time wondering if you’re on the right side of the barricade.

Whatever you want to call it, when you buy a stock, you make a bet. And a lot of macro-economical factors must hit right for the odds to be on your side. So, it’s not easy to be an investor. Not today, not ever.

The odds change as our position in the cycles changes. If we don’t change our investment stance as these things change, we’re being passive regarding cycles; in other words, we’re ignoring the chance to tilt the odds in our favor. But if we apply some insight regarding cycles, we can increase our bets and place them on more aggressive investments when the odds are in our favor, and we can make money off the table and increase our defensiveness when the odds are against us.- Howard Marks in “Mastering the cycles-getting the odds on our side.”

We recently witnessed a phenomenon called black swan. An unpredictable event that is beyond what is generally expected of a situation and has potentially severe consequences.

The index S&P500 bottomed on March 23 after sliding 34% from its record high on coronavirus worries.

Now, imagine you were an early investor on March 22?

Don’t worry. If you would stay calm, you’d be with more than 12% gains at today’s date. Supposing you didn’t sell any stocks. And that’s the thing about investing in the stock market. Euphoria and panic are sides by side.

If you’d invest in a stock like Tesla, you’d slide almost 60%.

Would your brain be prepared for that blow?

The Value of a Company Is the Sum of the Problems You Solve

We appreciate good management-we appreciate good industry-we enjoy a certain amount of “ferment” in previously dormant management or group of shareholders. But we demand value.- Warren Buffet

Elon Musk has been proving that he’s not just an industrial designer and engineer. He’s a damn good CEO.

You can argue much stuff about him, but he won the battle. Tesla’s the number one company in the electric vehicle new world. And he’s just starting.

Tesla is investing hard in AI, self-driving car technology, or battery technology.

I know people who love Tesla. I know people who hate Tesla.

You know what? That’s not important. But the numbers are. You can argue whatever you want, but Tesla entered the S&P500, and it’s now the fifth most valuable company in the index.

Their mission is to dematerialize the auto and the energy industry. With Tesla’s vertical integration on every single aspect they manage, probably you’ll see Tesla annihilating the internal combustion engine industry. And preparing to do the same with the oil industry.

We, humans, hope so- for the good of our dear planet.

I’m Portuguese, and in my country, we are crazy about soccer. And there’s a dictate that says,

The winning team does not change.

Meaning, if your team is winning, the coach should keep the same eleven players.

I bought Tesla stocks in the early days. So, why should I be selling them if I’m beside the winning team?

Only if I’m afraid of the markets to go deep down.

But come with me in this exercise. Imagine we’re in 1999, right before the tech bubble burst.

And you have just finished a buy on Amazon stocks. It was 17 December 1999, and you bought $10,000.

In the next days and months, you’d assist a nightmare of the worst kind. Your $10,000 would lose 90.83% from the day you bought Amazon stocks until 10 September 2001.

You’ve bought them at $94.06, and they came down to $8.63.

My question is, would you sell them?

Imagine you’d sell your Amazon stocks with a loss of 25%. You’d get out of the market at $7,500.

Now I’ve had this crazy idea about someone who would stay until the end with their stocks, from 17 December 1999 until today.

With a $10,000 investment in 1999, buying Amazon stocks at $94,06, you’d now have $331,087.60.

Nothing can predict the stock market. But you can study companies. Understand macro-economic trends. And make your bets.

One’s will work; others don’t.

About Tesla, I believe it will be the most valuable company in the world by far.

That’s my bet.

Final Thoughts

Ray Dalio is the founder of Bridgewater Associates, the world’s largest hedge fund. And he has been warning us that we are at the end of an outstanding debt cycle.

Because what most people and their countries want the most is wealth and power, and because money and credit are the biggest single influence on how wealth and power rise and decline if you don’t understand how money and credit work, you can’t understand the biggest driver of politics within and between countries so you can’t understand how the world order works. And if you don’t understand how the world order works, you can’t understand what’s coming at you.- Ray Dalio on LinkedIn

Dalio has been studying debt cycle history for more than 5,000 years ago. I think we’re in the sixth or seventh inning of the game in terms of that cycle, he recently said.

So, the next five years are going to be challenging because of these three factors:

1- You’re observing a disruptive technology tsunami causing a deflationary environment.

2- You’re in the last great debt cycle.

3- You have China trying to defeat the United Stated from the throne as the world’s most powerful country.

It’s like you’re heading to a perfect storm.

We don’t know. Maybe we’ll be heading to a prosperous era like no other time in history.

The more you know about the stock market and the investment world, the more you don’t know.

It’s always a bet against the uncertainty. A bet against the future.

It’s a belief — a faith prophecy.

Of course, I’m preparing to rebalance my portfolio. I’m heavily invested in tech companies. But I’ll rebalance, selling some stocks and buying Gold and Bitcoin.

However, if you believe in Tesla or any other company, why should you sell this specific stock? Why should you sell a company that works?

Whatever happens to the world, from a macro perspective, I’m not going to sell my position. I’m not going to sell my Tesla stocks.

Why?

Because I believe Tesla will change the world. I believe in Tesla’s fundamentals. And I think Elon Musk is an outstanding human being.

It’s a leap of faith.

Sign up for my email list and join the happiest readers on Medium. (This is where you get exclusive access to my daily activities, experiences, and daily thoughts)