Matt Peek – Investment Analyst — New Zealand Shares and Property & Infrastructure – 21 November, 2019

In an ideal world, we would never sell an investment. We spend a lot of time and energy hand-picking great companies that can deliver attractive returns for investors over the long term. But we live in a dynamic world – far from utopia! Making smart decisions to sell is therefore an important but often overlooked part of the investment process.

There are three key times we might sell an investment

• Firstly, if our ‘Investment Thesis’ or rationale for owning a company changes permanently for the worse. Like a great castle, if our company’s ‘moat’ narrows then it will be a matter of time before its competitors lay siege and breach the walls. For example, there may be changes in technology over time or we may lose confidence in the management team to make decisions that create value for shareholders. In the case of recent exit Abano Healthcare, the benefits we expected from its corporatised dentist business model were not accruing and so we sold our position (at a price comfortably in excess of the current takeover offer).
• Secondly, if the valuation becomes too rich then it can be a poor investment for years. That said, we do not often exit companies purely on valuation.  Great companies can make us look foolish by finding ways to create value that we did not account for in our valuation models.
• Thirdly, we are always looking to replace moderate conviction investments with higher quality ideas.

We use disciplined processes to make good ‘sell’ decisions

Many investors succumb to biases that are part of human nature. ’Anchoring’ to the price you paid and feeling the urge to buy more shares as the price falls is an example of a common bias. Buying at a lower price makes sense, although the mistake here is not properly scrutinising whether the prospects of the business have changed for the worse. It can be psychologically difficult to sell a bad investment at a loss, because crystallising the loss means you are admitting you are wrong and will never break even on the trade.