When to sell

I hardly ever sell stocks. I’m far too stubborn and full of myself to admit I am wrong. And it is rare for me to start a position with a massive amount of money. By the time something that size has really gone south and I’m full of regret, there isn’t too much left to salvage. And usually there is at least the hope that perhaps the market is wrong, and it will eventually rebound.

Maybe I am actually right!

It is even rarer for me to sell after just a few months. I don’t like trading. There are more fun things to do. There are times I try to play cycles (a nasty habit that is hard to kick) but even in those cases I like to hold for about a year. I believe that although in the near-term stocks can be volatile and moves can be irrational, over time sanity usually wins out. So, it is really hard to judge right or wrong over just a couple of months of trading.

But last week, I broke all of my own rules and went against all of the pie-in-the-sky platitudes about patience and good laziness that I’ve preached in this newsletter. I think I probably owe you, the reader, an explanation why. Even if I don’t, it seems like a good idea to articulate it for myself.

Last week, I sold Intel, a stock I had only just purchased in June.

Full disclosure: I’m not the one to ask about semiconductor stocks. Most of what I know about the semiconductor industry I learned watching the video for Such Great Heights. (And if you are not familiar with that song, leave this and watch the above immediately.) My lack of knowledge will grow apparent as you read. Do not buy or sell any stocks based on reading this. And certainly, don’t jump to conclusions about the semiconductor industry based on it.

Indeed, if I’m honest, Intel was never a high-conviction holding anyway. I’ve owned ASML, the company that makes the high-end machines that make chips, for a long time. And I buy into ASML’s thesis (as highlighted below) that the world is going to continue to demand more and more chips. Today’s vehicles alone have upwards of 1,000 chips inside them. Unless the world is backing away from a future of not just smartphones and smart TVs but also smart toasters and smart toilets, there is ample future demand.

Chips have always been a highly cyclical industry. Last summer, as fears about the Fed and the potential for a recession were on the rise, all of the semiconductor stocks were falling. It felt like a good opportunity to think beyond the wave, to focus on that long-term future ASML has done such a good job of articulating at a time when Wall Street was focused on the near-term.

Via some combination of science and sorcery that I could not fully explain now if I tried, I narrowed my search down to Intel and Taiwan Semiconductor. To keep it brief, I really admire Taiwan Semi’s model, but Intel was stupid cheap and had a great dividend. With all the talk about in-shoring there is a simple case to be made about why Intel can rebound to part, if not all, of its lost glory. And did I mention it was stupid cheap?

I bought Intel shares for $39.30 apiece. It was not a very wise decision.

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As I said before, I’m a pretty stubborn investor. I get a lot wrong. I don’t usually sell seven months later just because the stock is moving in the wrong direction. If I sell, it means either I didn’t fully understand what I was buying, or the thing that I was buying had changed. And to some extent, Intel has changed what it is, so therefore what I was buying has changed. But to be honest, this is 99% on me.

That dividend that seemed too good to be true was, in fact, too good to be true. Last week Intel cut its payout by 65%. It was just a few weeks after CEO Pat Gelsinger had told investors he was committed to the dividend. We (I) took it to mean he was committed to the dividend at its current level, when it appears what he really meant was he was committed to paying something.

That’s on both of us. Gelsinger has spent a good bit of time over the past six months noting the dividend and the importance of the dividend. But investors, myself included, took those comments and turned them into a reality distortion field that made us unable to see the obvious: Intel has a lot of bills coming due as it builds out its capacity and revamps its business, and those bills have to be paid somehow.

But the biggest thing I did wrong was I picked the inferior business based on my perception I was getting a deal. It was obvious last year that Intel was not running well. It is even more obvious today. My colleague Nicholas Rossolillo, who is much smarter than me, especially when it comes to chips, was saying last year that Intel reminded him of IBM in the early 2010s. That’s definitely not an endorsement. My mistake was believing I knew better than Rossolillo when all I was really doing was looking at the stock price.

I still believe in the big-picture, long-term thesis on chips. I am still somewhat anchored on price to the extent that I won’t look at some of the higher flyers that have been winners. I still really like Taiwan Semiconductor’s model as sort of the chipmaker for all. And the China fears, though real, don’t really move me.

I took the proceeds from my sale and bought shares of Taiwan Semiconductor. I had about 39% less capital to put to work this time around thanks to the fall in Intel’s stock price. And I bought Taiwan Semi shares at a level about 40% above what I could have had them for back in November. But, ironically enough, roughly the same price they were trading at when I decided to instead go with Intel last summer.

I don’t know if the semi cycle is over. I am not sure Taiwan Semiconductor is a good buy for the next year, two years, or even five years. But I see enough in the company and its potential to have a lot more conviction about this purchase than just “it looks cheap.”

Time will tell. But I have at least some reason for optimism that, up or down from here, I won’t be selling TSM in six months. And that’s a start.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be.

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