When is selling the right option

We all find it much easier to collect things than to throw them out, and if you have ever invested in shares, you will know that it is also much easier to buy than to sell.

The moment you own a share in a particular company, you feel emotionally attached to it and you’ll look for a very good reason before considering selling it.

Sir John Templeton once said that “bull markets are born on pessimism, grown on scepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

If you don’t focus too much on South Africa, equity investments worldwide leaned heavily towards the optimistic side these past few years, with the MSCI All World Index continuing to reach new highs since July 2016.

Lately, however, I have seen increasingly pessimistic views surfacing, and those views are often accompanied by the question as to whether the time has come for the investor to sell his shares.

In my opinion, well-known author, Philip Fisher, got it right when he said: “If the job has been correctly done when a common stock is purchased, the time to sell it is – almost never.”

You may, however, have a valid reason to sell, which is why a proper strategy is of crucial importance. Always be sure that your original reasons for buying these shares are still in place. Has something changed in the company or its competitiveness?

Would you still buy this company’s shares at the current price? If your answer is “no” to the last question in context of the first, you may seriously start to consider selling.

There may also be other good reasons for selling:

Comparing apples with apples

A good reason to sell may be that you have identified an opportunity that offers better prospects for the growth of your capital at the same risk.

Your reasons for the original purchase may still be in place, but if, for example, you expected a particular company’s value to increase by 12% per year, but think you may have identified another company with the potential to increase its value with 20% per year during your analyses, this surely justifies a sale.  

The eggs in your basket

Keeping your portfolio balanced may be another good reason to sell or reduce a position. Let’s imagine that you were lucky enough to pick a winning share that grew so much that it now comprises a significant portion of your portfolio. Does this justify a sale?

Unfortunately, there is no easy answer to this question.

It depends on your personal risk preference. You need to determine the limits for a single position as a percentage of your total portfolio. South African unit trust guidelines state that one shouldn’t invest more than 10% in a single share, but that remains your personal choice. 

The winds of change

Poor financial performance, unreliable management and increased competition may also offer good reasons to sell. In such cases, you should always revert to the most important question: what was my original reason for buying this share?

Evaluating each and every share in your portfolio on a regular basis remains extremely important. Ask yourself if there have been any significant changes in the company’s offerings, management and competitiveness.

Did these changes influence your original reasons for investing in this company? Are there better opportunities available for investing your capital? Are you uncomfortable because a particular company is taking up too large a portion of your portfolio?

Have you taken the capital gains tax implications and any other possible costs of this portfolio change into consideration in your final decision? If you answer yes to any of these questions, you could consider selling as an option with a clear conscience.

Schalk Louw is a portfolio manager at PSG Wealth.