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Picture: Unsplash/Kelly Sikkema
Picture: Unsplash/Kelly Sikkema

Selling an investment when I am wrong is the easiest thing in the world. I was wrong and I exit, take the loss on the chin and move on. But perhaps “wrong” is a loaded word here, because is the issue price or actual fundamentals? It can be either.

The best business in the world is a dud if the share price isn’t moving higher. Now, a lack of share price movement can be offset by dividends received: a few local small caps I hold had no share price movement for years, but the dividend yields were chunky, so I was sitting pretty.

Also remember that share price is as much a reflection of market sentiment as it is of the actual business.

So generally I am less concerned about the share price, especially if the dividend is juicy. But a falling price makes me double down on the fundamentals, and it is usually these numbers that make me sell.

When buying a share we have expectations about growing revenue, profits and dividends. We need to understand what will drive these higher and I put them into a few simple bullet points which I then watch like a hawk.

If my assumptions about growth are not working, admitting defeat is relatively easy and I’ll exit.

The flip side is when to sell winners. This is where it gets really tough.

Many experts will work out a fair value using one or another valuation technique and when that fair value is achieved they’ll start selling. But this assumes markets are rational; they’re not. Valuations can go well beyond any reasonable expectation and selling at a fair value often means leaving money on the table.

So then what?

Well, back to the list mentioned earlier. If they’re doing what I’d expected and continue to grow and excel, I want to continue holding even at lofty valuations. But now it can get tricky.

The investment might be a 10-bagger in a couple of years, but now it just has an outsized weighting in your portfolio — which brings its own risk. For instance, what if that 10-bagger was Steinhoff and you didn’t sell before the collapse in December 2017?

But you’ll probably have very few frauds in your portfolio, so I wouldn’t worry about that. Yes, it’s a risk, but one I can live with.

The mistake I have made over the decades has been selling down when the weighting gets too large. This cost me as I was selling my winners.

So my strategy is to hold on. Other stock gains will help manage the weighting, as will inflows of new money to other shares in the portfolio.

A 10-bagger makes a real difference in a portfolio and we need to be careful about selling them too soon — because a 10-bagger can become a 20- or 30-bagger one day. Just make sure the business remains of the highest quality.

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