Wednesday, 3 August 2011

The Lost Art of Selling Stocks - Excerpts from Sanjoy Bhattacharya's column in Forbes

I am a great admirer of Sanjoy Bhattacharya, Prtner in Fortuna Capital. I enjoy his talks and columns that he writes for Forbes. This month he has tackled a great topic that merits repeating and internalizing. Here are some of the important thoughts from his article.

"I had managed to acquire any investment wisdom considering my labour of love for the past 25 years. ... it struck me that selling smart is probably the single most important element of investment success over the long-haul. In fact, I would dare to go one step further and suggest that accepting losses promptly is the key to investment nirvana."
"more often than not, one is too early to the party and the wait can be fairly embarrassing. In addition, the problem with a truly long timeframe is that in a fair number of cases the dynamics of the business begin to shift gradually which counter-intuitively has a disproportionate impact on price"
Private equity investors looking to buy a business typically have a holding period between three and five years. While too short a horizon typically leads to over-trading and disastrous results, it is vital to establish a finite exit point in order to have a realistic understanding of ‘intrinsic value’ and judge what management can realistically achieve. So, buy-and-hold is a sensible approach provided the fundamentals remain in good shape and in line with what can be reasonably expected but ‘forever’ might stretch both intellect and judgment to the brink.
While remaining disciplined in terms of the process of stock-picking, the seasoned value investor waits patiently for Mr. Market to provide opportunity. Typically, there are just four reasons to sell:
  • A clear deterioration in either earning power or ‘asset’ value.
  • Market price exceeds ‘fair’ value by a meaningful margin.
  • The primary assumptions, or expected catalysts, identified prior to making the investment are unlikely to materialise or are proven to be flawed.
  • An opportunity likely to yield superior returns (with a high degree of certainty) as compared to the least attractive current holdings is on offer.
Two genuinely useful primers I would recommend are The Zurich Axioms by Max Gunther and It’s When you sell that Counts by Donald Cassidy.
“Dead money” does insidious damage to the sensible portfolio, not by falling precipitously and then getting stuck in a narrow range, but far more by preventing redeployment of the same capital in distinctly superior opportunities.
Two simple rules come to mind. First, what works for me personally, after years of coping with unremitting losses is to sell out completely whenever a new investment shrinks by more than 15 percent. Not only does this deal with my dumber prejudices and blind spots in a ruthlessly efficient manner, more importantly it frees capital. With ‘dead money’ it is probably best to sell one-third, maybe even half the holding rather than the entire position simply because such stocks occasionally experience incredibly short, sharp rebounds. That is probably the moment to get rid of the rest! One final comment: When you are carrying out a portfolio review, resist the temptation to sell the stocks with the best profits. Instead, relentlessly focus on selling the companies which meet the BBBB test — bent, broken or beyond belief!
The other really serious affliction is refusing to sell because of the taxes that need to be paid. In a sense, this amounts to putting the cart before the horse. The idea behind sensible investing is to earn profits, not avoid taxes.
 Read the full article here: http://business.in.com/column/column/the-art-of-selling-stocks/27282/1

2 comments:

  1. sell whenever a position loses 15% on its cost? not sure this is ideal...especially when one goes with "value"....coca cola after 1987 buffett purchase, went down 30% before becoming a multiple 100 bagger on his cost price....in today's volatile environment, not sure if losing 15% is out of the norm...

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  2. That is right. 15% is what Sanjoy uses as his rule-of-thumb. It might be different for you. I think on a high level he is trying to say that you need to have a stop loss to your investments where you get out and protect your capital. That percent maybe 10%, 15% or 50%.

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