The Anxiety of Selling

 

Summary: A Disciplined Approach to Selling

For value investors, the decision to sell is not driven by market panic but by a pre-defined, disciplined process focused on the company's intrinsic value, not its stock price.

The Core Principle:
Selling criteria are established at the time of purchase. The goal is to buy businesses so strong that you are unlikely to ever need to sell. A sale is only triggered by a permanent deterioration in the very factors that made the company a good investment in the first place.

Key Reasons to Sell:
Deterioration is categorized into three areas:

1. Internal Issues: Poor management behavior, unclear financial reporting, aggressive acquisitions, or excessive executive pay.

2. External Threats: New competition, disruptive technology, or regulatory changes that harm the business model.

3. Economic Decline: Shrinking profit margins, falling returns on equity and assets, declining earnings, or a worrying increase in debt.

What Does NOT Trigger a Sale:

• A falling share price alone is never a reason to sell.

• Temporary bad news should prompt investigation, not an immediate sale.

Practical Strategies for Uncertainty:

• The Hedge: If you are unsure whether a problem is temporary or permanent, a common strategy is to sell only a portion of your holding.

• Taking Profits: The same "sell some, not all" approach can be used when a stock reaches a high price target, allowing you to lock in gains while keeping a stake for future growth.