Chapter 15 of How To Value Invest Excerpt Part 2: When To Sell A Company’s Stock

When To Sell A Company’s Stock

Even though I talked about this a little bit earlier in the book I wanted to expound on my decision-making thought process when selling a company.  Thank you to those readers who asked that I write about this because this is something I struggled with mightily when starting investing.

I have read many times that you should not only come up with a sound buying process but also a sound selling process as well.  For the first several years of my value investing journey I completely ignored this advice when it came to selling and took each sell decision on a case by case basis with no actual decision-making processes intact other than what I thought about the company on that particular day.  This worked for a while but caused some major short-term problems for me once fully invested in my personal portfolio.

Before talking about that situation we need to go back to see why I was fully invested at the time though.  Once I started getting serious about becoming a much better value investor and refining my processes and techniques I started to find more and more companies that were undervalued that I wanted to buy.

However, I still owned some companies from before doing any real research, most of which I was in the red on, and didn’t want to sell them before I made my money back.  As you can imagine, that worked out horribly as you will see below.

Do not buy companies without doing research and do not hold on to bad investments just because you want to make your money back, it will end up costing you even more money in the long run like it did for me.  Do not be stubborn like I was.

Soon after I got serious about digging into companies I found Dole which was talked about in chapter 8.  That chapter was based on my second article about Dole but I actually wrote my first article about them in late May and early June of 2012 describing why I thought they were massively undervalued and how they could sell or spin-off some of their assets to get rid of their massive debt load which would help unlock that undervaluation.  I bought the company in that time frame for the portfolios that I manage but not in my personal portfolio because I was fully invested and in my stubbornness did not want to sell companies that I was losing money on as I described above.

Luckily for the portfolios I manage within 100 days of buying into them, Dole announced that it was going to sell its worldwide operations to Itochu which would enable them to pay off all of their debt if they chose to do so.  The cost basis of the shares I owned of Dole in those portfolios was $8.50 a share.  Dole’s shares had been slowly rising over time but after this announcement came out it sent the share price over $15 at one point and I ended up selling the shares in the portfolios that I manage around $14.50 per share for a gain of 66% in 104 days.

This still hurts a lot more than any actual losses I have had because I put together a good analysis, did the proper due diligence, the investment thesis came together like I thought it would, but I was too stubborn and emotional to sell those other companies so that the situation could be taken advantage of in my portfolio.  What would you hate more, losing a little bit of money on a bad company that you do not want to own, or losing out on a nearly 70% gain in around a 100 days like I did?  Unfortunately I know which hurts more.  Do not let your emotions take control of your investment decisions.

After this I decided that I needed to have solid sell decision processes in place so that I would no longer agonize over my sell decisions, help take emotion out of the equation, and alleviate my inherent stubbornness.

Instead of doing things on a case by case basis which would let emotions make the decisions for me, I now have a very regimented sell decision-making process and will sell in the following cases no matter what:

  1. If I find another company that is a better company to own; more undervalued, bigger margin of safety, better profitability, etc than the company I’m thinking about selling.
  2. If my original investment thesis turns out to be wrong.
  3. If the company’s management starts doing things that I do not like.
  4. If I buy into a company and it reaches the higher end of my valuation range quickly.
  5. If a company I own reaches the higher end of my valuation range and the market as a whole is overvalued.

If a company doesn’t meet any of those criteria I generally plan to hold onto the company for years if my original investment thesis continues to play out.  I also recommend revaluing each company you own at least twice annually as well because its valuation will change when its new quarterly and annual reports come out.

You need to factor the new numbers into your valuations to get a new valuation range when its operations and profitability change over time.  For example if a company continues to improve its operations and profitability over time, the company could remain perennially undervalued and become further undervalued over time.  Search Brazil Fast Food on my blog for an updated valuation of that company for a great example of the previous.  Obviously the reverse will be true also.

Biggest lessons from this section: Do not be like how I was as an early “investor”, do not let emotions and stubbornness rule your decisions, and come up with your own very sound, regimented buy AND sell decision-making processes, the earlier the better.

If you have enjoyed this and other portions of the book I have released thus far please visit this page to buy the book and to see the three reviews, all of which are 5 stars, that the book has received thus far.

If you would like to read other excerpts from How To Value Invest that I have released please view this page.