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How Do Expert Investors Make Sell Decisions?

January 19, 2013 | About:
The decision to sell liquid investments such as stocks and bonds is much harder than the buy decision. The reason for this is simple: human emotion. When an investor is considering purchasing a new position they aren’t psychologically wedded to the idea. Therefore, they can be open regarding the relative strengths and weaknesses of the investment.

However, when an active investor expresses a position in a security, they undoubtedly have a reason. Upon purchase, the investor is now committed to the idea. If the investment increases in value, either the investor was correct in their thesis or the investor was just lucky. Either way, the investor feels good that the investment increased and is hopeful for additional gains.

Having a specific selling strategy is paramount for success. Some value investors have price targets based on analysis, some sell only when they find better ex-ante values in other securities. The below quotes are curated to represent the selling methodologies of exceptional investors.

“If investors could predict the future direction of the market, they would certainly not choose to be value investors all the time. Indeed, when securities prices are steadily increasing, a value approach is usually a handicap; out-of-favor securities tend to rise less than the public's favorites. When the market becomes fully valued on its way to being overvalued, value investors again fare poorly because they sell too soon.”

- Seth Klarman from “Margin of Safely” Page 12


“Only sell to buy a security that is a third cheaper than the stock you currently own.”

- Benjamin Graham

“An investor should never sell out of an outstanding situation because of the possibility that an ordinary bear market may be about to occur. If the company is really a right one, the next bull market should see the stock making a new peak well above those so far attained. How is the investor to know when to buy back?

It is my observation that those who sell such stocks to wait for a more suitable time to buy back these same shares seldom attain their objective. They usually wait for a decline to be bigger than it actually turns out to be.”

-Phil Fisher

“If the stock does not give you 50% in three years, sell it - it’s most likely a value trap.”

- Benjamin Graham

“We sell in the open market when things become grossly overvalued. We are just not that good at selling when things are moderately over priced. We also sell when we make a mistake. Mostly we sell when our companies get taken over. Most of our sales are not to the market. I’ve been doing this for a long time and I’ve held securities for three years and sold them after they’ve doubled only to see them triple over the next six months. When you don’t know what you are doing, doing nothing is the best course of action.”

- Martin Whitman

“Do not try to buy at the bottom and sell at the top. That cannot be done expect by liars”

- Bernard Baruch

“Make a clear distinction when selling between 'compounders' and cigar butt stocks." Once the cigar butts get to fair value, it's time to move on, because the cigar butts are "just going to go down again."

- Christopher Brown

“Bill (Nygren) liquidates a security because his analysis was right and the market comes to recognize the value of his investment. In that situation, he unloads a stock when its price reaches 90 percent of its fair value… Bill recognizes that valuation is not a precise exercise—he simply tries to get in the right ballpark. A company’s true worth likely falls within at least a 10 percent range on either side of his single point estimate. If he is going to err, Nygren would rather sell early than wait for the stock to reach what may be an overvalued level.”

- Oakmark Literature regarding Bill Nygren

About the author:

GrizzlyRock Capital
Mr. Mowery is a long-form thinker and value investor with a credit focus. In 2011, Mr. Mowery founded GrizzlyRock Capital which is a long / short investor in corporate debt and equity. Prior to founding GrizzlyRock, Mr. Mowery held leveraged finance positions on both the buy-side and sell side. Mr. Mowery holds an MBA from the University of Chicago Booth School of Business and a BA in Economics from the University of California, Los Angeles. Mr. Mowery can be reached at kyle@grizzlyrockcapital.com.

Visit GrizzlyRock Capital's Website


Rating: 4.2/5 (18 votes)

Comments

batbeer2
Batbeer2 premium member - 1 year ago
>> Having a specific selling strategy is paramount for success.

Paramount? That's a fallacy.

In 1948, Benjamin Graham invested a quarter of his firm’s capital in GEICO. Within a decade, it became a 15-bagger. Graham clung to his GEICO shares (the ones he ended up owning personally) till he died almost thirty years later. That's how he made most of his money.

Buy only what you'd love to own for the rest of your life and investing becomes painfully simple.

IMHO thinking (and acting) like an owner is paramount for investment success.
Cornelius Chan
Cornelius Chan - 1 year ago
"Buy only what you'd love to own for the rest of your life and investing becomes painfully simple."

This may be the investing style you are comfortable with and excel at. Remember there are different investing styles. Walter Schloss achieved Buffett-like returns by "renting" cheap and/or undervalued shares and selling them once they became expensive and/or overvalued.

So... there are two ways to invest: rent cheap stocks and sell when they hit a price target (like Walter Schloss), or buy and hold the best growth companies for the long term, riding the wave of ever-increasing earnings and/or profit margins etc. over the years (like Warren Buffett).

Like Geoff Gannon says... we each have to choose our own investment style - the one we are comfortable with and will do - and stick with it.

GrizzlyRock Capital
GrizzlyRock Capital - 1 year ago
Batbeer - I'm glad you have a strategy that is "painfully simple" and finds great businesses which do not become overvalued (either absolutely or relative to other opportunities) during your lifetime.

While this strategy may be psychologically easy, long-term returns are likely less than an approach in which you sell securities if/when they become overvalued or Mr. Market offers cheaper opportunities.

Buffett only went that way when he couldn't move the needle on mispriced securities due to scale. Other superb active investors such as Klarman, Berkowitz, Singer etc all sell securities as part of their exceptional long term records.
batbeer2
Batbeer2 premium member - 1 year ago
>> So... there are two ways to invest: rent cheap stocks and sell when they hit a price target (like Walter Schloss), or buy and hold the best growth companies for the long term, riding the wave of ever-increasing earnings and/or profit margins etc. over the years.

Yes.

And that is precisely why I disagree with the statement that a specific selling strategy is paramount. It's not.

In defense of acting like an owner:

1) Even Zuckerberg managed to beat all the Schlosses and Klarmanns by doing it.

2) It's only appropriate since ownership of a business is precisely what stocks represent.

3) You'll have an edge since no one else is even trying.

Maybe I wasn't as clear as I could have been.

Your point: you need a clear exit strategy.

My point: you don't.

Many investors have generated satisfactory returns with an exit strategy.

Some investors have generated satisfactory results without one. QED.
augustabound
Augustabound - 1 year ago
Your point: you need a clear exit strategy.

My point: you don't.

Some people need and exit strategy.

Some people don't.

I don't think this is a black and white issue, everybody has their own investment goals.

Most dividend investors hold quality companies forever for the income and don't have an exit strategy.

Other investors need a defined finish line (good or bad) to enter the sell order.

GrizzlyRock Capital
GrizzlyRock Capital - 1 year ago
Batbeer - Your original point was clear yet unsubstantiated. The investors with the best records have selling strategies during the years their track records are established.
Bill.Smith
Bill.Smith premium member - 1 year ago
Hey, gents. There's alot of ways to do value investing for sure. I'm like Batbeer, I prefer the Buffett approach. But, I have had the occasional Graham/Schloss style investment.

IMO, I would characterize it as its paramount to know under what conditions you'd sell a given security. I view it this way--deciding not to sell is, in and of itself, a decision about your exit strategy where instead of continually buying/selling, you're opting to hold. Then under what conditions might you sell? To replace it if you project a significantly higher return, and equal quality, with the replacement stock; if it becomes grossly over-valued; if you need the cash, or if you made a mistake in purchasing the stock in the first place. If you decide to hold, then every potential investment is measured against the best idea in your portfolio, and it keeps me focused on the front end of buying the right thing (for me) so I don't have to worry about selling. That's not to say I haven't made my share of mistakes :-)

As far as the buying/selling approach likely leading to higher returns...YMMV. I find it more important for me to know what my internal yardstick for performance is and measure my long-term performance against it. And the Buffett-style approach works quite well for me.

GrizzlyRock Capital
GrizzlyRock Capital - 1 year ago
Excellent points Bill
batbeer2
Batbeer2 premium member - 1 year ago
>> Your original point was clear yet unsubstantiated.

Fair point.

1) In recent years: the best record by far that I know of, is that of Charlie Munger and Rick Guerin at DJCO. They haven't sold a stock in 15 years. The IRR over that period has been in excess of 25%.

2) In the past: Of all the "Superinvestors of Graham and Doddsville", Rick and Charlie have the best records. As fund managers, they held their stocks for decades. They were either forced out of their holding when the companies were eventuellay acquired or the holdings were spun out to their clients when they wound down their funds.

3) In general: The only strategy l know of that's guaranteed to beat the market regardless of the acumen of the investor does not define a specific selling approach.
GrizzlyRock Capital
GrizzlyRock Capital - 1 year ago
Batbeer - good points and solid article regarding DJCO last year.

Regarding the Buffett partnerships, I was under the impression he was moderately active in recycling his portfolio into cheaper assets. For this comment I don't have specific turnover metrics and am instead relying on Klarman's comments about the 3 stages of Buffett's career.

Thanks for the debate - it focuses us all on sharp thinking!

batbeer2
Batbeer2 premium member - 1 year ago
@ GrizzlyRock

Yes, you make me think hard, thanks.
Koheleth
Koheleth - 1 year ago
I lean toward Batbeer and Chris Brown on this one.

Of course you can make money renting cigar butts or other severe mispriced stocks and sell when appraised value is reached. Buffett has done this with Petrochina and his basket style approach to Korean equities. Partly I think he does that because he still enjoys that style of investing from his partnership days.

But the big money as Buffett has said himself (see the U of Florida lectures on Youtube) come from buying and holding the compounders like Coca-Cola or his wholly-owned businesses, businesses that in his words "make more and more money over time" (or surfing the wave for a long long time as Munger says in his essay on investing), and if you've got those, as the Oracle himself says, "you don't need to do anything else". Hence, there is no exit strategy, only an "entrance strategy".

Buffett's friend and early BH investor Dick Holland in Omaha became rich from simply holding his shares. In the BBC interview Holland says he tried to thank Buffett for making him rich, and Buffett told him in return, "I didn't make you rich, you didn't sell."

ansgarjohn
Ansgarjohn - 1 year ago
Mohnish Pabrai in The Dhandho Investor says sometimes when a stockprice goes down because of bad news and you aren't 100% sure what the intrinsic value is, you'll be tempted to sell. You are then in a "chakravyuh". His m.o....

"A critical rule of chakravyuh traversal is that any stock that you buy cannot be sold at a loss within two to three years of buying it unless you can say with a high degree of certainty that current intrinsic value is less than the current price the market is offering.

Whenever I make investments, I assume that the gap is highly likely to close in three years or less. My own experience as a professional investor over the past seven years has been that the vast majority of gaps close in under 18 months."
gpaw
Gpaw - 1 year ago
I think some of you may be missing the point: the fact that someone is holding an investment forever doesn't mean he doesn't have an exit strategy, just that the conditions for abandoning that investment have never happened.

There can be lots of legitimate reasons for selling: the company has become ridiculously overvalued, technological change has made its products obsolete, management has become grossly incompetent, etc.

Buying a position in a company and then completely forget about it because you "intend to hold it forever" is taking the buy-and-hold approach too much to the extreme, and it's not a sound investment strategy.
Cornelius Chan
Cornelius Chan - 1 year ago
Gpaw, what you say is very good.

Another thing nobody has mentioned is compounding. Correct me if I'm wrong, but holding stock for the very long term shares of a good, growing company will eventually lead to compounding returns. I don''t fully understand compounding and it would be good if an article were written up on it here.

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