Why I’m Taking Profits in the Stock Market Now

It’s been nearly a decade since I last made the deliberate decision to increase my cash position. 

Now, I want to be clear—this isn’t a market crash prediction. But the market is more richly valued now than it was over the past decade, and a key philosophy of Steady Compounding is that I don’t invest money I would need for the next five years.

The rationale for this is simple: the last thing you want is to be forced to liquidate your portfolio during a market drawdown when everything is cheap.

While it’s intoxicating to watch my portfolio make new all-time highs and ride the market’s momentum, it’s just as important to stay grounded and follow my investment principles—even when it means going against the grain.

If I want to sell, I want to come in from a position of strength, do it on my terms, and in my favor. With the market trading at a 29x P/E multiple—one standard deviation above the 10-year average of 24x—it’s a good time to reassess and plan for the future.

As I expect significant expenses over the next five years, I will liquidate a portion of my portfolio to set aside cash for these costs.

Longtime readers will know that I’m dividend agnostic—meaning I don’t care whether a company pays dividends. What I care about is total shareholder return, which includes both capital appreciation and dividends. To think otherwise at my current life stage would be irrational.

This means that I’m comfortable selling shares for consumption. Dividend loyalists may not be comfortable with this, but you need to understand that when a company issues a dividend, it essentially distributes part of your ownership of its assets back to you. This is similar to liquidating a portion of your ownership when you sell a stock, except that it is more tax-friendly in the long run, and you get to do it on your own terms.

Note: As a Singaporean, I’m not taxed on capital gains, but I do incur withholding tax on dividends from U.S. investments.

The essence of Steady Compounding is to grow my portfolio sustainably over the long run—to maximize returns while taking into account the risks assumed. Preserving capital is paramount; I prioritize investments that offer the potential for sustainable growth without exposing my portfolio to excessive risk. I will never trade for a few more percentage points of return if it requires my portfolio to assume the risk of permanent capital loss. This philosophy guides not only my investment choices but also my portfolio structure. More specifically, I don’t invest in microcaps, nor do I have a concentrated portfolio.

I invest in businesses with wide moats, where management is continuously attempting to widen them over time. A wide moat is less valuable without a long growth runway, so I look for companies that can grow because they are in an industry with tailwinds, or they are able to eat into competitors’ market share, or they are able to increase prices—or, preferably, all of the above. I seek companies with enduring competitive advantages, strong financial positions, and the potential to thrive for decades, not just quarters.

I’m disciplined when it comes to valuations because a great business can be a lousy investment at the wrong price. This means I usually buy when there’s a drawdown, when the market perceives that a company’s moat is permanently breached because of a couple of bad quarters, but I deem that the market has overreacted and is missing the bigger picture. These periods of pessimism often present the best opportunities to acquire high-quality companies at attractive valuations.

Looking back, the 2022 downturn was challenging. The S&P 500 PE multiple dipped one standard deviation from its mean on two occasions that year, yet those were the times to plant the seeds for future gains. 

Fast forward to today, and I’m happy that my investments in Meta, Adyen, Netflix, MercadoLibre, Nu Holdings, Brookfield, and Microsoft paid off in a big way. And to a smaller extent, Amazon, Tencent, Trip.com, Tesla, PayPal, and many others, which have provided solid returns, although not quite to the same magnitude.

Selling is never easy—it’s often more challenging than buying during a downturn when fear is rampant. For me, it always goes back to the philosophy of Steady Compounding—growing wealth sustainably over the long run. 

This means my sell decisions will take into account position sizing, the future of the company’s growth runway and economic moat, and its current valuation.

A common trap in selling is the sunk cost fallacy—getting attached to the price you initially paid. This major mental hurdle causes many to compound bad investing decisions. Overcoming this bias requires a disciplined and objective assessment of a company’s future prospects, devoid of emotional attachment. I don’t care if a stock has run up a lot or is in the red; what I care about is the future—the strength of the business and the expected returns.

There’s plenty of literature on buying but less so on the art of selling. So, I hope today’s post on my investing philosophy and selling framework helps. If you have any questions, jump over to the comments section below, and I’ll try to answer them.

Until next time.

Compound steadily,

Thomas

P.S. In my upcoming members-only report, I’ll reveal my recent selling decisions and provide insights into my reasoning behind each position I’ve chosen to trim or exit. The report will be published this Friday at 6 a.m. Singapore Time (Thursday at 3 p.m. Pacific Time).

If you’d like access to this exclusive report and all my earlier stock research, become a member here:

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