Thinking about selling

Selling is an interesting problem that many investors have... When things are not profitable, cutting your losses can be hard. When things are incredibly profitable, selling too early and missing out can be hard. So how the heck can anyone ever make a good decision to "sell"?

This is complex for selling any investment - publicly traded, privately held, commodities, you name it making a decision to sell an investment is a hard decision to make. This is one of the biggest things that haunt value investors, growth investors, and speculators alike. Waiting too long to sell and selling too early can mean missing out on a lot of profits! Personally I've mis-timed this a lot in the past and have missed out on huge opportunities.

Mauboussin would tell you that you may think your decision to buy (based on great logic) may be poorly influenced by bad luck and your great decision may look incredibly stupid. Does that mean you should sell though? Will that luck continue to be bad and the great investment you bought continue to perform poorly?

What about investments that do great? If you bought into Facebook when they were private and owned them through the IPO (I didn't btw) - should you sell now or should you continue to hold based on the idea that the base they built as a private company is only going to get stronger? Investors in Google who continued to hold are continuing to do incredibly well.

Some of my favorite quotes on selling...

Value investors should completely exit a security by the time it reaches full value; owning overvalued securities is the realm of speculators. —Seth Klarman, The Baupost Group

Selling for me is rarely about pure valuation. The really good ones are too hard to find – you don’t want to part with them lightly. Life experience tells me that if you sell something at $50 and tell yourself you’ll get back in if it goes back down to $35, it will go down to $35.01 and the next time you have a serious look it will be at $300. That hurts. —Chuck Akre, Akre Capital

The market encourages all kinds of anchoring. The price at which you bought a stock is very vivid in your mind, but in reality you’d be much better off if immediately after the purchase you forgot the price you paid. We also ascribe importance to 52-week highs and lows, but why that? It would make as much sense to look at the highs and lows over 70 weeks, or 40 weeks. —Adam Weiss, Scout Capital

Warren Buffett talks about a company’s value moving through innovation, imitation and then idiocy phases. We’re most comfortable in the early stages when we think we’re kind of writing the intellectual property. That’s not to say there’s not a lot of money to be made in the imitation and even idiocy phases, but it’s not our native
ground. If we’re saying the same thing as the consensus and something is no longer misunderstood, chances are we’re selling.  —Dan Ariely, Duke University

These are all great, but it doesn't really make the decision easier. Deciding when to sell really depends on why you bought in the first place. Did you buy a public security with a target in mind? Was that target a revenue/growth target or a price target? Was the price target based on a mispricing in the market or an anticipated new pricing in the market?

What about private investments - did you buy with a timeframe in mind, a milestone, or just a plan to hold onto it forever?

  • If you bought with a price target (regardless of how you arrived at the price target) - wait until the investment is near that target - 80%-120% of the target.
  • If you bought with a growth target and no price target - sell when the growth is achieved regardless of how much the market appreciates the growth.
  • If you bought with a timeline target - sell on the timeline, sticking to this is important.
  • If you bought with a milestone target - hit the milestones and get out.
  • If you bought to hold it forever... well you should still sell if you have a better opportunity to put your capital to work elsewhere. Remember the Cost of Capital is truly the anticipated value of your second best idea. So if investment #1 is performing just 'ok' but ends up being your second best idea, you should probably sell and invest in your best idea if you don't have other other capital to invest.

Investing is a science and an art, but there isn't a lot of room for overly emotional attachments that cloud good judgement. I like to use covered calls to force rigor in my long term publicly traded investments and wish there was a way to do the same on my private investments.

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