Key insights
- This article discusses various value investors' approaches to selling stocks, emphasizing intrinsic value, thesis integrity, and psychological guardrails. It highlights the shift from rigid price targets to holding compounders, selling when intrinsic value is reached or the investment thesis breaks. The piece also acknowledges the role of behavioral biases and the importance of portfolio-level thinking. While focused on value investing, the principles discussed can inform broader investment strategies.
While reading Vitaliy Katsnelson’s book The Little Book of Sideways Markets, a podcast interview he was on revealed a new approach to selling than the strategy presented in the book. This observation led me to a broader examination of how various value investors approach the topic of “selling” and I compiled the list below. I also fed all these different views on selling into Google Gemini and asked it to provide the most salient themes. They were:
Intrinsic value as the North Star
- Selling is fundamentally a function of underlying business value, not market price action or arbitrary gain thresholds
- The primary trigger for a sale is when the market price converges with or exceeds your estimate of intrinsic value
- As a stock appreciates, your margin of safety decreases and downside risk increases, sometimes necessitating a sale
Evolution from price targets to compounders
- Rigid price targets are often too conservative for truly exceptional businesses
- Revisit original valuation assumptions and assess the conservatism before selling winners
- Hold great businesses even when they get overpriced, only consider selling when they get egregiously overpriced
Thesis Integrity and Automatic Exits
-When the fundamental investment thesis is broken (fraud, earnings restatements, etc.) sell immediately
- Don’t rationalize holding a cheap stock if the quality has evaporated, avoid being the sucker at the poker table
Psychological Guardrails
-Human emotions are the biggest enemy, leading to selling low or holding too long; use rational rules (like minimum holding periods) to counter behavioral biases.
-Focus on the portfolio as a whole rather than getting emotionally attached to individual securities.
Note 1: A lot of the investors have pointed out that great fortunes have been made through taking concentrated positions and having long holding periods. While this is true, there is also a significant amount of survivorship bias here. A lot of the great bankruptcies and squandered fortunes were people that had concentrated positions as well. So, it’s a double edged sword.
Note 2: I’d recommend The Little Book of Sideways Markets. It’s a quick and easy read, filled with useful information, presented in an easy to digest way. However, the book was written in 2011 and makes several scary forecasts and predictions about the global, US, and Japanese macroeconomies over the next decade or so. Because 15 years have passed, a lot of these predictions can be tested/verified, and they turned out to be extremely wrong. I think there’s a story to tell there about macro predictions, how hard they are to get right, and why you should be skeptical when you read them. But that’s a story for another day.
The actual post is to copy in full but you can find it here: https://lotsofvalue.substack.com/p/a-bunch-of-different-investors-thoughts