Between buying and selling, there seems to be a lot of thoughts on buying and little on selling.
Selling often seems to be the harder part of the equation and not much effort had been put into understanding it.
A good buying decision often negate the need to sell, but sometimes to filter down to a good decision includes making tons of mistakes and possibly selling along the way.
This article is a review of what could triggered a sale.
There is multiple variables to help decide selling.
Some like to sell when a stock hits a high.
Some sell when the stock breech their stop loss.
Some like to sell when there is bad news (it often pays to be the first to panic).
Some like to sell when there is no news (stock will trade range bound for a long time).
These selling are justified but the reason for selling often need to differ from the share price movement.
For me, to sell means that the investment theory had expired or had been invalidated.
Expiry is simple, the investment theory had matured and should be closed.
Invalidation meant that something had change and there is a need to update the probability and the expected return.
Expiry on Valuation:
Sometimes, there is an improvement in valuation and there is a likely chance that the company is being price fairly now. The company is not a compounder and there is little or no chance for any double digit gain in the near future.
Banking stock is something that I am comfortable to buy at a discount to NAV and sell above NAV.
Expiry on Catalyst:
If the purchase of the company is done on the basis that there is a catalyst in place, then it should be sold base on that too.
The catalyst could be a spinoff, an impending share buyback, takeover or a changes in management. The news should be information that one can effectively put a probability on.
DXC is a clear case where the decision is made to sell due to an artificial cap on the upside due to a takeover attempt. When the takeover failed, the position was established back at a lower price.
Expiry on Timing:
There are other times when you buy something because it looks cheap and then wait for certain catalyst to happen. The trade is tricky as there is very little buyers on the market at any point of time. There is a need to time the exit cautiously as you may be the market!
I had invested in FSL during their rights issues. When FSL started to move higher due to their special dividend announcement, there is a need to reduce portfolio risk as FSL is a nano-cap with minimal volume. There is a need to exit when there is volume coming into the company.
Invalidation on Knowledge:
Sometimes what we believe and what is the truth differs. Our knowledge had not caught up with reality. Deceiving oneself that you know is an easy way to continue the mistake, owning up meant selling.
When you find that you have a hard time averaging down, that is the time to sell. That means that you do not have the adequate conviction in that company.
Standard Chartered is such a company. There is so much unknown that exiting is the best course of action despite knowing that it is dirt cheap.
Invalidation on Theory:
The theory formulated is meant to be tested and invalidated. When news occurs, our probability needs to be updated which often resulted in a change in the expected returns.
This updating of the new information may inform us to buy more or sell the position. When the theory gets invalidated for any reason, there is a need to sell the position.
Dairy Farm theory of recovery faded despite having Covid tailwind. The health and beauty retail business and the Chinese grocery market had weaken further under competitive environment. The view of their business had dimmed and the decision is to exit.
Hope you are enjoying my reflection for the year.
I will be back with more news about this newsletter after Christmas.