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Buy And Hold Vs. Rotational Strategy: May 2020 Update



  • Many investors find it difficult to sell high-quality winners. But when high prices push expected future returns low enough, even the stocks of the best businesses should be sold.
  • My goal is to demonstrate the long-term validity of taking profits in overvalued stocks by understanding sentiment cycles.
  • I also share a rotational strategy that allows investors to take advantage of these cycles.
  • In this update, I include the expected 10-year CAGRs for the stocks we're still tracking.
  • Looking for a helping hand in the market? Members of The Cyclical Investor’s Club get exclusive ideas and guidance to navigate any climate. Get started today »


This article is a follow-up to a series of articles I recently wrote about how to avoid losses and how to profit from sentiment cycles. If you are already familiar with the strategy, feel free to skip down to the "Highlighted Stock of the Month" section and read from there. If you are new to the series, I'll explain the background and goals of the series in the next few sections to get you up to speed. Part one of the series, "Ignore Sentiment Cycles At Your Own Risk," explained what sentiment cycles are and how even the stocks of high-quality companies can sometimes become overvalued enough to sell. I also shared a working theory of the factors that I think contribute to the formation of a sentiment cycle with any particular stock. In part two, "Mitigating Sentiment Cycles," I shared a long-only investment strategy that can help investors avoid some of the losses associated with a sentiment cycle by rotating out of the overvalued stock and into a more defensive position; then, when the price of the overvalued stock comes down, rotating back into the stock and being able to own more shares than when you sold it without spending any extra money.

For example, let's say one owns the stock of company XYZ and it trades at $100. The business is a great business, but the price has become so expensive that the implied future returns if someone bought the stock at that price are so low that it makes sense to sell it. Now, let's say there is a defensive ETF like the Invesco S&P 500 Low Volatility ETF (SPLV) which also trades at $100 but is likely to trade with much less volatility than the market and unlikely to fall as far and as fast

If you have found my strategies interesting, useful, or profitable, consider supporting my continued research by joining the Cyclical Investor's Club. It's only $29/month, and it's where I share my latest research and exclusive small-and-midcap ideas. Two-week trials are free.

This article was written by

Cory Cramer profile picture
Cory Cramer is an award-winning political scientist and a long-only cyclical investor capitalizing on market cycles. He has been investing since the 1990s and still invests his own money in the companies he writes about. Cory leads the investing group The Cyclical Investor's Club where he shares his unique approach to estimating the fair value of stocks by capitalizing on downcycles for undervalued companies. He teaches 4 unique cyclical strategies, offers a master valuation spreadsheet, and is available to answer any questions via chat or direct message. Learn more.

Analyst’s Disclosure: I am/we are long SYK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (27)

Thank you for the article. As a newbie, this helps me a lot!
One question though: how to evaluate if a stock is overvalued or not if it’s been only introduced to the market few months ago? To add more complexity, the said stock took momentum and is already above what analysts expected, but still way below what similar companies are traded for.
Cory Cramer profile picture
Thanks for the question. Usually, for stocks that have yet to experience at least one recession, I simply put them off to the side in my "too hard" pile and ignore them. Currently, this means I don't cover about half of the S&P 500 stocks because they don't meet my minimum criteria. That means my universe of investable stocks is smaller, but there are still plenty of them out there.
As for the second question, I mostly ignore what analysts say except to get an idea of what the market expectations are for a stock, and even then, it's not very actionable information. Analysts tend to be at least one step behind the market. If a stock trades at a discount to peers, that would get my attention and it would make me more curious as to why. It might cause me to do more research than normal to see what the reason is. Usually the market isn't too far off when comparing peers, but sometimes it can be irrational. Generally speaking, though, I would consider a peer discount more of a warning sign that something might be wrong, than a sign there is value to be had.
William Darusmont profile picture
Cory, good article but you are making a bet that you are correct. As a former RIA I find a much simpler and one that doesn't make one ask "why did I do that?" when the outcome is not the expected one. I suggest what most managers do and that is REBALANCE, which has less risk and less tax implications on the portfolio. A failure to rebalance is a major factor in portfolio underperformance in the long run.
Cory Cramer profile picture
Thanks for the comment, William. There are at least two ways you may be talking about rebalancing. The first is rebalancing between one's stocks and bonds. For an advisor, I completely understand why this approach is advocated for clients because it serves to lower the volatility that might cause a client to make rash decisions at the wrong time, and also there has traditionally been an inverse relationship between bonds and stocks. I personally don't own any bonds except for some ultra-short-term bonds I use as a cash-equivalent in my wife's retirement account because that is the only option for something approaching cash. So, I essentially have two modes in this regard, cash and stocks, and that means rebalancing between stocks and bonds isn't an option for me.
For investors who have chosen a stock/bond mix and want to potentially apply some of my strategies to their portfolio, I suggest simply applying my strategies to the stock portion of their portfolio and letting the bond portion of their portfolio do its own thing. And if they want to rebalance between them that's fine.
The second rebalancing possibility you may have been referring to is rebalancing withing the stock portfolio. That is something I have come to fairly strongly oppose, if it's just for the sake of rebalancing. Most of the gains we see in the market this cycle have come from a relatively small handful of winners. Not letting the winners run (provided they don't become extremely overvalued) is a big mistake in my view if you are fortunate enough to own a few of them. For example, if I had sold part of my Apple position when it became overweight in my portfolio, even though it was still undervalued at that time, I would have left a lot of money on the table.
It's worth thinking for a moment HOW a position that started equal-weighted might become overweight. Since I sell extremely overvalued stocks, in order for a position to become 5x overweight or more, earnings have to be growing at a somewhat similar rate as the price, so if I'm still holding a stock several years later, the business has really earned it via their earnings growth no matter how much the price has risen, and I don't see a reason to sell.
There might be a few extreme scenarios where if most of my investments over the years turned out to be duds and a single stock, like Amazon or something, amounted to 50% of my portfolio, and I was nearing retirement, it might make sense to diversify somewhat, but under most circumstances, I'm for letting winners do their thing as long as earnings are growing along with the price.
5ofDiamonds profile picture
Rotational strategies only look good on paper @Cory Cramer The fact is that buying and selling like this can only be done by algos, or humans with no emotions. For most investors, they are better off focusing on their buys of quality names, and leave them alone. The issue with buy and hold strategy that I have noticed in myself is that I buy B-grade businesses because they are on sale, or too many folks talk about it as being cheap, and I regret it later.
Cory Cramer profile picture
@5ofDiamonds Come on. You've been following my work for a long time, I think you know this approach is more than just looking good on paper, and investors who were members of the Cyclical Investor's Club before this recent sell-off would tell you that their portfolios are in much better shape by selling overvalued stocks and buying good stocks when they are cheap.
That said, it doesn't mean it's easy, and it doesn't mean many (or even most) investors might be better off in an index fund, if they don't have the temperament to go against the crowd (and the news).
While it's easy to buy 'B' grade businesses looking for value, I spend a lot my time avoiding them. I think there are something like 5,000 to 7,000 stocks one could buy in the market at any given time. I only track about 300 of them right now, and if I expanded to more international stocks I estimate I could maybe find another 100 worth tracking. So, I would generously say that if we are investing long-term, 90% of stocks in the market are either sub-par or 'too hard'. That means the odds of investing in 'B' grade businesses is pretty high unless one has a decent method of avoiding them. So, while I don't want to downplay the difficultly of just anyone finding value in the marketplace, it is possible.
Traders eat like chickens and go to the bathroom like elephants,Taleb? never sell is stupid ,reverse to the mean?even "good companies go down,sell them take profits buy it back later.
Cory Cramer profile picture
When a person truly owns a really great company they can take comfort in the fact over the long term they will probably earn money, but when they buy at a very high price, while they may make money, it is likely to be a very small amount of money. And when one is only earning a very small amount of money, the risk of eventually being wrong about the great business is higher because you have to hold the position for decades in order to double the investment. I'm sure in the year 2000 people thought GE was a great business. Look how it has done.
Buyandhold 2012 profile picture
Even the stocks of the best businesses should be sold?

Sell Berkshire Hathaway?

Sell Apple?

Sell Microsoft?

Sell Abbott Labs?

Sell Amazon?

Sell Home Depot?

Sell Philip Morris?

Sell Disney?

Sell Johnson & Johnson?

Sell Sherwin Williams?


Never. Never. Never. Never. Never.
Cory Cramer profile picture
If they are overvalued.
Flip4Flop profile picture
While I believe what you are writing is true it looks like you made a lot more because you bought stocks that fell hard during a black swan event while they were recovering. While I would imagine you would still make more than holding during normal market conditions it portrays an unrealistic type of gain for a situation that has only happened a handful of time in the market.
Cory Cramer profile picture
That's a valid point. In last month's update I shared a chart from my 2018 series, which did not include a black swan event and also did not include a rotation into cash. seekingalpha.com/...
If you scroll down to the bottom of that article you will see that the returns are skewed very heavily in favor of the 2018 rotational strategy and most of the rotations were actually completed back in December of 2018 or earlier. So, I have some evidence that it works even without a 'black swan'.
Also, in this series, the black swan cut both ways. I mean, there is no way Clorox would be up as much as it is without COVID, so it does caputure some of general luck, both good and bad, that occurs in real life. That's the advantage of having such a large sample size to work with.
Flip4Flop profile picture
Totally in agreement with you that it works just wanted to be sure to point out that for those who may see this for the first time that this time of gain would not be the norm.
Glad to come across this article.. I bought MPC @21 back in March and I’m thinking about selling @36 today. It would be a short term gain, but I think the 25%ish tax would be worth it if I were able to get back in if it happens to dip below 27-28 again. Any thoughts?
Cory Cramer profile picture
I've been using trailing stops, especially for cyclicals like MPC, once they a little above a price I'm happy selling at. That's what I did with Apple. I think my sell threshold was actually crossed at around $260, and I put a 10% trailing stop in when it hit $285 or so (I'm going from memory, here.) And I figured if it immediately dropped -10% and I got stopped out I would be fine with that. But the momentum carried the stock all the way up into the $330s or so before falling and triggering my stop around $309. Capturing that extra momentum from $260 or so up to $309 was pretty close to enough to pay the taxes on the sale.
The danger is that you never get that 10% cushion from the price you feel comfortable selling and the time you put the stop in. So, in my case, if Apple would have gone up to $280 and then fallen to $180 or something before I put my stop in, I just would have been stuck holding. But right now, I feel pretty comfortable overall trying to capture that upside momentum as much as I can and risking having to keep holding the stock. (But I only buy stocks I'm willing to hold long-term if need be.)
I really appreciate the lengthy and detailed reply! The plan was to hold MPC long term or at least long enough for the long term capital gains, but at close to 80% profit I feel inclined to sell and like you say put that profit into something with more upside for now until MPC (hopefully 🤞🏽) dips
then great company go up to 125 and the other go down to 60
Cory Cramer profile picture
It's possible. But I think I bought some pretty good companies during the downturn, and they could have a lot of upside left as well.
Greenhorn Investor profile picture
Thanks for the article, Cory. Like I commented at the time you first wrote about it, you have some big apples to sell Apple.
Cory Cramer profile picture
It has been interesting to watch Apple stock. And this month (ironically after I sold my stock) I bought my first Apple product, a MacBook Air, because I had some video editing I wanted to do and my Chromebook was limiting what I could do. I love the Air, even though it's taking me some time to learn a new operating system. I haven't used and Apple since the 2C, in school, back in like 1986 or something :)
It's one that if we were mid-cycle and it traded around fair value and I had the cash I might buy it with an 8% 10-year CAGR expectation, just because I think we have pretty good visibility long-term on Apple's business. But I don't regret selling it when it was expensive. I've already made far more than I would have by holding during this time.
Actionable Conclusion profile picture
To quote Mark Cuban: "Buy and Hold is a crock o shit."

To watch Warren Buffett... he talks buy and hold... but he's selling en masse in spring 2020.

To watch to Sam Zell: He'll Buy and Hold... until it makes sense to sell.

To protect my portfolio... I stay flexible, and try to remain emotionally unattached to my positions.

There are many ways to win in the market, and many ways to lose too.

If your portfolio is performing well, and you are avoiding the big mistakes... you're probably making good decisions, and that's what its all about.
Cory Cramer profile picture
Yeah, I think with Buffett in particular, investors need to realize the difference between him and them. If he were to sell a big winner, like, say Coca-Cola in 1998 or something when it traded at a 60 PE, he then has tens of billions of dollars he has to find a new home for. His choices are very limited (and taxes were higher back then, too).
For example, during this last dip, investors have complained he didn't buy anything. I bought over 30 stocks in March, but the only ones with a market cap over 30 billion dollars were a few big banks (most of which Buffett already owned). So, there really wasn't anything for him to buy. If he had sold Apple when I did, for example, he would be sitting on even more cash now, where I was able to put it to work in some decent mid-caps.
When Buffett was younger and he wasn't managing as much money, he sold overvalued stocks all the time, probably even some fairly valued ones if he found better deals. So, I think people take a pretty simplistic view of Buffett if they think he's a buy and hold investor.
You think people take a simplistic view of buffet… I believe I have a very simplistic understanding of the market. Seems like you have been gifted with a strong analytical mind. I can get Brain exhaustion just looking at your charts. I to bought Apple in 2012 and held until a couple of months ago, sold just before the big run up. I didn’t like any Apple products, my kids talked me into getting a Mac, I hated it.
It’s astounding to me you found 30 buys after selling Apple and I didn’t find one. So you see, I need to invest/trade on your knowledge. Thanks for your hard work and for posting.
Cory Cramer profile picture
Thanks. I wish I could have put public articles out faster during the downturn, but I was working 10-12 hour days for close to three months straight doing my best to keep up with everything, especially in March. And I wanted to share the ideas in some sort of orderly and consistent manner, which I'm trying to do now in my latest articles. I still think there is a good chance the market comes back down again, so now is the time to prepare, and have a shopping list ready.
I've taking profits before on overvalued stocks. My problem is how much? Do I sell entire position or not? Always struggle with this...
Greenhorn Investor profile picture
The answer to me is "It depends...".
Cory Cramer profile picture
I think the important thing is to find the system that works best for you, and then to stick with it consistently. My approach of selling all at once was fairly heavily influenced by the fact that I share most of these moves via public articles, and it was simply much easier and cleaner to make a single bold decisive call and act on it. Over time, that approach has grown on me and it fits well with my larger approach of taking small 1% portfolio weighted positions. (Though I do allow myself to buy a single additional 1% weighted position in the same stock, I find myself rarely doing it as of late.)

So, let's say another person limits their portfolio to the 20 best stocks they can find at any given time, and a full position is 5% of their portfolio for any given stock. It would be much easier for them to ease into a stock with 5 individual purchases and out with 5 individual sales using that approach. I don't think either approach is necessarily superior or weaker than the other. My method of analysis is usually much faster than most investors, so I think that I have a little bit of an edge at the portfolio level if I spread my bets around to different industries and market-caps, and make decisions quickly and decisively about whatever comes up. I think it's harder for most investors to do that well.

But the main thing is that you figure out a system that you feel pretty comfortable with, and then apply it consistently. Then if you notice any patterns over time you can adjust. I noticed a couple of years ago that my overweighted positions tended to be my biggest losers and that if just would have equal-weighted everything I would have done much better, so that's what I started doing. But depending on the investor, the opposite may be true, some may be better at deep research and that's where their edge is, in that case they might want bigger positions, and that in turn may allow them to ease in and out more easily than I can using such small positions.
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