You invest in the stock market to make money. For this, the selection of the companies we buy as well as the acquisition price are essential. The various fund managers devote a good part of their marketing efforts to explaining their investment principles and processes. Analysts spend a lot of time identifying and analyzing their bets. But the decision to sell is just as important to obtain long-term returns. This decision can have a significant impact on them. If a stock falls 50% and we hold it, it must be revalued by 100% to recover the investment. If it falls 75%, an improbable 300% revaluation will be necessary to avoid losing money.. The price of major banks over the past 15 years is a good example, despite the revaluation of the past two years. Selling requires a divestment discipline that is rarely discussed.
There are several reasons for deciding to sell.
- Perhaps it is a question of opportunity cost. We prefer to allocate money to more attractive investments with higher risk-adjusted returns.
- In other cases, it is sold in response to certain price increases or decreases, setting price levels or percentage changes that trigger the sale decision.
- Another criterion may be the fundamental valuation that a manager has of the company. If the stock price reaches said fundamental value, it would be necessary to sell.
These reasons are price-based decisions. Perhaps most important is to understand why the stock was purchased and to revisit the initial investment thesis. The company’s business model or its growth factors may age over time and lose its competitive advantage. European telephone companies have seen the fundamentals of their businesses deteriorate over the last twenty years and with them their stock market value. Some investors will still remember that Telefónica traded at levels close to 30 euros per share. You have to view and understand business as a business, not just a price.
The emergence of new technologies, regulatory changes, changing consumption patterns and new competitors are causing a continuous adjustment in the relative position of companies. Kodak, BlackBerry or Nokia are clear examples. Companies that have disappeared after enjoying dominant positions in their respective markets. Normally, companies’ results emit alarm signals, such as a deterioration in their sales growth, their results or their cash generation. We must be able to discern whether those potholesare the result of specific issues, or if they respond to a progressive change in trendSupermarket sales are influenced by the number of weekends in a quarter or road traffic by the weather, especially in winter.
The company’s executives’ decisions should also cause them to reconsider keeping a stock in their portfolio.. It is frequently observed that successful companies move away from their business models in which they have a competitive advantage. In search of continued growth, they embark on investments or corporate operations that have often been very detrimental to the stock price. In other cases, this growth is achieved, but by diluting shareholders with continuous capital increases. Experience has shown that companies with poor corporate governance tend to generate negative surprises.
The so-called value managerswho invest for the long term in companies with strong fundamentals and depressed stock prices often say that the holding period for their preferred shares is forever. A phrase that barely corresponds to reality. In recent months, Warren Buffett Sold Over $100 Billion in Stockssignificantly reducing its positions in Bank of America and Apple, selling at significant gains.
Low portfolio turnover is not an inherently good factor in itself, nor does it guarantee profitability. Each stock must earn its place in an investment portfolio every day. A professional manager or individual investor should not fall in love with any company. In such a changing world, it is increasingly necessary to monitor the relative position of each security compared to others in which one could invest.
Other investment styles are more short term, buying and selling very quickly. This is the appeal tradeor there are speculative investments based on the news generated by a company. In both cases and just like in games of chance, you have to know when to fold or let your hand go. Norges Bank Investment Management is a fund that manages almost 1,500 billion euros and is a major investor in the Spanish stock market. It recently invited Annie Duke, a professional poker player, to give a lecture to its employees on how to manage risk and when to back out of a bet. The book The Big Bluff by Maria KonniKova, a former world poker champion, emphasizes the same theme. Susquehanna is an American trading company, with more than 3,000 employees and holding 22% of the shares in the intermediation of equity derivatives in the United States. Their training program for newly hired employees includes 100 hours of poker play in casinos.
Buying and selling have a common factor, in both cases we are talking about making predictions about future results. However, the buying process appears to rely more on investment processes and analysis than on a selling decision which is frequently influenced by psychological aspects of investor behavior.
To win on the stock market, you have to know how to buy and sell.
