Today we will review the results of last week’s “Selling – Whys and Whens” survey. Thank you to all who took it! A few details to kick off the conversation:
- The survey ran from Monday May 10th to Friday May 14th.
- There were a total of 351 unique respondents. As usual, the vast majority (98 pct) were from the DataTrek community, with 2 percent of responses from social media.
- We randomized possible answers where it made sense to do so, including simple “Yes/No” replies.
- Percentages presented below may not add to 100, solely due to rounding.
- We have bolded the most common answer(s) to each question in the commentary below.
Reader note: we will publish our usual Sunday night work on US corporate earnings expectations, bond spreads, traffic congestion data, etc. tomorrow.
And now, on to the survey results…
Q1: Have you sold any financial asset in the last year, either in your personal account or in those you manage for others? (Choose one)
- Yes: 92 percent
- No: 8 pct
Comment: This was a staging question, meant to put the respondent in the right frame of mind to answer the rest of the survey, but let’s briefly discuss why we even ran a “selling” survey.
First, selling is a profoundly underappreciated part of the investment process. Most of the financial press and Wall Street analyst community focus on “what to buy today”, paying less attention on “what to sell”. This isn’t just blind optimism. “Buying” is a feel-good message since it feeds on humans’ inherently acquisitive natures. “Selling” can trigger a sense of loss or fear of missing out (FOMO). Case in point from outside the world of finance: Americans google searches with the word “Buy” 6x more frequently than queries that include the word “Sell”.
Second, when it comes to investing “selling” is not the opposite of “buying”, so it deserves independent airtime. Selling can mean acknowledging error, rarely a pleasant process. But every successful investor/trader we’ve met in +30 years on Wall Street knows that little losers usually grow up to be big ones and sell them before they get out of hand.
Lastly, we’re very mindful that the S&P 500 has a steep fundamental hill to climb from here, and many upcoming events could make US large cap stocks a “Sell” soon enough. Our simple but sensible heuristic is Jessica’s “10 percent 3-peat curse”: the S&P 500 rarely manages a three-year run of +10 percent returns. We’re right there at present, with the index up 11 percent after back-to-back double-digit gains in 2019 and 2020. Maybe the S&P can overcome this historical headwind, and maybe it can’t, but having some discipline around a “Sell” decision is a good idea just now.
Takeaway: We’re still in the bullish camp, but most of this survey was aimed at parsing how investors consider the whys and whens of the selling process.
Q2: Do you routinely rebalance portfolios (yours or those you manage) between major asset classes or among individual securities? (Choose one)
- Yes, annually: 10 percent
- Yes, quarterly: 10 pct
- Yes, monthly: 9 pct
- Yes, but only when allocation/position sizes warrant: 50 pct
- No, or only very infrequently: 21 pct
Comment: about 30 percent of respondents have some routinized selling built into their investment process with rebalancing, which is essentially two-sided dollar cost averaging. The other 70 percent are not on a preset schedule, although we assume even the 30 percent make sales between their nominal reallocation dates. The responses over the rest of the survey certainly point to that conclusion.
Q3: Which scenario best describes one where you’d be likely to sell a security outright or at least a partial position in a security? (Choose one):
- When it makes a new 1-year high: 25 percent
- When it makes a new 1-year low: 6 pct
- When it is stagnant but similar securities are increasing in value: 53 pct
- When it is stagnant but similar securities are decreasing in value: 16 pct
Comment: Since the majority of the DataTrek community are investment professionals, we were not surprised to see the strong focus on relative performance (69 percent in total) and specifically selling underperforming assets (53 pct). That all makes sense.
We were intrigued by the ratio of those who would sell a new high versus a new low (4x), however, since it goes so much against basic trading/investing discipline. You add to new highs, you sell new lows, and we know survey takers are familiar with this longstanding rule. We suspect that respondents took current market conditions into account, where new highs are better to sell if you feel the investment climate is growing more uncertain.
Q4: In your opinion, is valuation alone a good enough reason to sell an equity security? (Choose one):
- Yes: 22 percent
- No: 78 pct
Comment: we often say that “math is not an investment edge” and respondents clearly agree. At the same time, we also suspect that the very heavy “No” vote here is also informed by current market dynamics.
Specifically, the market is still revising its view of future US corporate earnings power; Wall Street analysts have increased their aggregate estimate of 2021 S&P 500 earnings by 12 percent so far this year. If one sold in January because “the S&P is expensive by historical measures”, then one missed the 11 percent YTD rally in the index because earnings are coming through better than expected. Math is even less of an edge when the numbers are wrong …
Q5: Is there any position in your portfolio or those you manage for others that you would never sell, regardless of market or economic conditions: (Choose one)
- Yes: 52 percent
- No: 48 pct
Comment: we were a bit surprised at this relatively even split, but it reminds us that there’s 2 distinct sorts of market participants. One invests around the idea of specific, core portfolio positions. The other is a bit more agnostic about what ends up in the portfolio. This is not unique to stocks and bonds, by the way. Online virtual currencies have “HODLers” (hold on for dear life) and traders (what’s working today is what I love). We’ve seen both approaches work over the years but sticking to one usually works better than trying a bit of both.
Q6: Let’s say you bought a security and it doubled over the next 3 months. What would be most likely to do, assuming it did not violate any position size limits? (Choose one):
- Keep the whole position: 38 percent
- Sell half: 55 pct
- Sell it all: 7 pct
Comment: at one level the responses here are just good money management – of course you let winners run in whole (38 pct) or in part (55 pct) – but they are also a sign of the times. If we had asked this question in, say, late August 2020 when the S&P was 57 percent off its March lows, we think the “Sell it all” option would have gotten more votes. If you’re looking for a survey response that points to excessive investor optimism, to our thinking this fits the bill.
Q7: In your opinion, is the threat of incremental regulation enough of a reason to sell any US “Big Tech” company right here? (Choose one):
- Yes: 18 percent
- No: 82 pct
Comment: this is our vote for the most surprising survey result.
We get it, though: there’s nothing in either US Big Tech’s valuations or their price action over the last year that points to any sort of regulatory overhang weighing down the group. Amazon has gone nowhere for 9 months, but every other Big Tech name has made new highs in 2021, after the US elections were fully decided. China’s version of Big Tech is a cautionary tale, however. Major stocks like Alibaba, Tencent, Meituan, and Baidu – all top 10 holdings in MSCI China – have been hard hit by recent regulatory initiatives. As a result, MSCI China is down 3.4 percent YTD.
Q8: Regardless of you answer to the prior question, which US “Big Tech” company do you think is a sell right here? (Choose one):
- Apple: 5 percent
- Amazon: 6 pct
- Microsoft: 2 pct
- Google: 3 pct
- Facebook: 40 pct
- I would not sell any: 43 pct
Comment: the DataTrek community just does not like Facebook’s stock, a fact that comes up repeatedly when we ask about its investment merits relative to other Big Tech stocks. Still, it’s hanging in there: up 17 percent YTD and beating the S&P 500. We assume the broader investment world has a similar view to our respondents, so FB may be the most contrarian Big Tech trade out there. Just based on this, we’d certainly not be short Facebook here.
Q9: Do environmental, social and governance issues rise to the level where you would or have sold a specific stock or industry because it fell short on these points? (Choose one)
- Yes, but it would have to score poorly on all 3 points: 12 percent
- Yes environmental: 7 pct
- Yes, social: 3 pct
- Yes, corporate governance: 17 pct
- No: 62 pct
Comment: ESG is clearly not yet a top-of-mind issue for the majority of investors, regardless of what one may read. This is not surprising. The last 18 months have been a challenging investment environment, to say the least.
We do believe ESG will continue to grow in importance over time, though. “Governance” has been an issue since the 1980s, and it still only polled at 17 percent in our survey on a stand-alone basis. “Environmental” and “Social” issues combined were 10 percent of the votes, but we could see that going to similar levels as “Governance” in the next 5-10 years. At that point, about half (45 pct) of investors would be making decisions within an ESG framework. Enough, in other words, to more systematically inform stock prices than may be the case today.
Q10: In your opinion, do any of these longer-run investment themes merit holding regardless of near-term (1-2 years) volatility: (Choose up to 2):
Themes with +10 percent of net votes:
- Biotechnology: 21 percent
- Green energy/electric vehicles: 13 pct
- Online virtual currencies: 12 pct
- Demographics (e.g., aging global/US populations): 11 pct
- Advanced Robotics: 10 pct
Subtotal of responses: 67 pct
Themes with less than 10 percent of net votes:
- Nontraditional finance: 9 percent
- US legal recreational marijuana: 8 pct
- Space travel/technology: 5 pct
- Autonomous driving technology: 4 pct
Subtotal of responses: 26 pct
Note: 9 percent of respondents replied “None of the above”
Comment: the further out a given disruptive technology breakthrough might be, the less respondents thought it was worth putting it on their “never sell” list. Biotech as an investment theme has been around for 30 years. EVs are going mainstream right now, as are virtual currencies. Demographics is an evergreen theme, as is Advanced Robotics. But the themes with less than 10 percent of the votes either face regulatory hurdles (finance, legal marijuana) or still need a lot of time and capital to perfect (space, autonomous driving).
Q11: What event(s) would be most likely to cause you to reduce US equity exposure in the next 12 months? (Choose up to two):
Events with +10 percent of net votes:
- Future corporate earnings expectations start to flatline: 25 percent
- Future inflation indicators break out to +10-year highs: 13 pct
- Fed announcement of tapering its bond purchases: 12 pct
- US 10-year Treasury yields break 2.5 percent: 10 pct
Subtotal of responses: 60 percent
Events with less than 10 percent of net votes:
- Oil prices above $100/barrel: 8 percent
- Corporate tax hikes becoming a clear reality: 7 pct
- Fed Funds Futures discounting +50 pct odds of a rate hike in the next 12 months: 7 pct
- Individual tax increases becoming a clear reality: 5 pct
- Big Tech regulation: 3 pct
- Announcement of a new Federal Reserve Chair: 1 pct
Subtotal of responses: 31 pct
Note: 9 percent of respondents replied, “None of the above”.
Comment: it’s all about corporate earnings, Fed policy and inflation/rates. Needless to say, we wholeheartedly agree. As much as tax policy gets attention, we suspect respondents understand that markets have known this was going to be an issue since Democrats won de facto control of the Senate this past January. A Fed rate hike will come after tapering, which is why the later got 12 percent of the vote and the former just 7 pct – together they are 20 percent, just behind corporate earnings.
Q12: If you had to sell/not own one of these asset classes and could not repurchase it for at least a year, which would you choose? (Pick one):
In order of popularity:
- 10-year Treasuries: 44 percent
- US high yield corporate bonds: 20 pct
- US investment grade corporate bonds: 11 pct
- Cash (i.e., you’d be fully invested for a year): 9 pct
- US small cap stocks: 5 pct
- MSCI Emerging Market stocks: 5 pct
- US large cap stocks: 4 percent
- MSCI EAFE stocks: 3 pct
Comment: not a huge surprise that respondents would, if pressed, give up their long-dated Treasury exposure for a year. What did surprise us was that high yield was in second position. With a +4 percent yield this is a solid asset class for income-sensitive investors, especially if you (like we) think oil prices are going higher. And very few respondents (12 pct in total) would sit out the next year with no exposure to global large cap stocks.
Summing up with 3 observations:
#1: We’re at the point in the current market cycle where it is sensible to consider when to sell/reduce risk exposure. We wouldn’t have run this survey a year ago, or even earlier in 2021, but enough of the events in listed in Question 11 could come to pass in the next 6-ish months (flatlining earnings, Fed tapering). That is worth considering as you start to plan the second half of 2021.
#2: Stick to the fundamentals. DataTrek’s readership is extremely broad and the “sell US stocks” triggers were earnings, rates, inflation and Fed policy. Not taxes, not tech regulation, not oil prices, not a potentially new Fed Chair. We’ll keep monitoring these issues, of course, because they could become important. But as of now, they are not hitting investors’ radar screens.
#3: It’s not money until you sell. As occasionally noted in the comments, we saw just a touch of complacency in some of the survey responses. That’s probably OK for now. But, for those readers who use our surveys to find the market’s Achilles heel, this is the big take away.