Market Buzz - Don’t Sell Too Soon

When should I sell? This is one of the most frequent questions we hear. Our glib (yet truthful!) answer: Never (ideally). We’ll come back to that shortly, but in the meantime, here are five reasons we do sell stocks.

Reason No. 1: Valuation

KeyStone Invests for the long term here, but sometimes Mr. Market shows our stock too much love. We will consider selling if a stock price has run up to a point where it no longer reflects the underlying value of the business. In some cases, our choice is to SELL HALF our original position in a stock that has had a very strong gain (100% for example) and remove all our original capital if the valuations are simply too rich. The strategy also removes all our initial risk capital and often allows us to continue to HOLD a great stock and in the process, sleep very soundly at night.

Reason No. 2: Better 0pportunities

Sometimes, there’s nothing wrong at all with a company or its stock. There are simply better opportunities elsewhere that will bring us more bang for our bucks. We will consider selling a less attractive stock (at a profit or loss!) if we think we can get a better deal elsewhere. Of course, this analysis is not simple and can be very stock specific.

Reason No. 3: Business Changes

There’s no way around it: Businesses change — sometimes significantly. We could be talking about a major acquisition, a change in management, or a shift in the competitive landscape. When this occurs, we incorporate the new information and re-evaluate to see if the reasons we bought the company in the first place still hold true. We will consider selling if:

• The company’s ability to crank out consistent profits is crippled or clearly fading.
• Management undergoes significant changes or makes a series of questionable decisions.
• A new competitive threat emerges or competitors perform better than expected.

We’ll also take into account unfavourable developments in a company’s industry. Here, it’s important to delineate between temporary and permanent changes. In a downturn, financial figures may suffer even for the best-run companies. What’s important is how these businesses take advantage of the effects on their industry to improve their competitive position.

Reason No. 4: Faulty Investment Thesis

Everyone makes mistakes. Sometimes, you will just plain miss something. You should seriously consider selling if it turns out your rationale for buying the stock was flawed, if your valuation was too optimistic, or if you underestimated the risks. Or if the environment has changed, such that your original investment thesis is now flawed.

Reason No. 5: It Keeps Up at Night

It is tough to put a dollar value on peace of mind, but if we did, it would be a pretty penny. If you have an investment whose fate has become so uncertain that it now causes you to lose sleep, this could be a great cue to move your dollars elsewhere. We are trying to reduce the stress in our life here, not add to it. We save and invest to improve our quality of life, not to develop ulcers. Adding insult to injury, stressing about a stock might cause you to lose focus and make rash decisions elsewhere in your portfolio. Remember, there’s no trophy or prize for taking on risk in investing. Stick with what you’re comfortable with.

Like Kenny Rodgers Says, “You've got to Know When to Hold ‘em”

While I am loathe referencing “The Gambler” when discussing our investment philosophy as the concept could not be farther from what we preach, the line fits. If these are the reasons to fold ‘em, how do we know when to hold’em?

Remember, we’re long-term investors, not weak-kneed speculators. It is important to note, not one of these reasons to sell is related to an “analyst” changing their recommendation or simply because a stock has fallen in price. Both of these items provide great fodder for the talking heads of the world but have absolutely no impact on the underlying businesses into which we are buying. Over the course of what will be a prosperous investing career for you, the market will rise and fall. Recessions and booms will happen. And all the while, you must stay focused on the long term. Fear is never a reason to sell.

Action: Put it in writing. For each stock in your portfolio, write down why you bought it, your expectations, and what would make you sell. Refer to it frequently — and before you decide to give your stock the heave-ho.

If your original reasons for buying the stock remains intact, the business is growing, management is executing and valuations remain relatively reasonable – our best advice it to ride out your winners long term.

Real World Example: BUY & HOLD for 7 Years – Never Once Recommended Selling!

Boyd Group Income Fund (BYD-UN:TSX): Shares up over 2,000%

The relatively unknown independent auto repair shop operator, Boyd Group Income Fund (BYD-UN:TSX), is a stock KeyStone recommended well over 7-years ago at $2.30 and continue to HOLD today (having recently recommended clients buy more) with the stock above the $47 level, despite the fact the stock has jumped over 2,000!.

While the stock has performed incredibly well, the company has more than quadrupled its revenue over the past 7-years, increased earnings by more than 5 times, and grown into one of the largest independent autobody repair firms in the U.S.

You only need a couple of stocks like this in your portfolio throughout your entire investment career to make you a successful long-term investor. You just have to know when and how to hold’em.