VALUE INVESTING
Can You Sell Too Soon?

By Stephen Bland (TMFPyad)
May 10, 2002

There was a bit of discussion recently on the value board regarding premature selling of value shares and whether anything could be done about this, in the case where a share went on to rise a lot further and some more profit could have been wrung out of it. In such discussions it is possibly a failing of human nature that people sometimes tend to forget conveniently those cases where the share went on to fall and regret only those where some additional gain was never made.

Looking back at some recent trades of mine, there were several cases where substantially more profit could have been made. Perhaps the best example over the last few years was London Pacific where I sold at about £8 having made a very good profit, but the shares went on to hit about £20 or thereabouts following which they collapsed to the present price of under £3. If I had hung on a bit longer I could have made a lot more money. If I had hung on a bit longer still, I would have lost all the gains. Another share was Inchcape. It made a good profit but after I sold it went on to make a lot more and so far has held on to those further good gains.

Against those though I could quote Royal & Sun, which since I sold a while back hardly went higher at all if I recall correctly and subsequently fell to its present historically low price.

So how do you know when to extricate yourself for maximum gain?

You don't.

Shares are a bit like old girlfriends. Never look back. Have no regrets. Move on. The excitement is in the next play, the next girlfriend if you will, not in the replay of old situations where you already know the result.

You must have a way of timing your trades. Any method of timing is going to be imperfect so that you can never get in at the exact bottom or exit at the exact top. Forget it, be content with making regular decent profits. Clearly the strategy needs to be sufficiently refined so that adequate profits are made repeatedly over long periods, but chasing profit which falls outside your strategy becomes an emotional event rather than a strategic one. And emotional involvement is not likely to prove a rewarding approach in the long run.

Remember that if you make say 20% a year on average over many years, then you are trashing almost everyone else in the market. The trick is to achieve this with the minimum risk. Two people each making this sort of return, but using different risk strategies are not in the same boat even though ostensibly that might seem to be the case. The winner is the guy taking the lower risk. This must be understood. The one with the lower risk is more likely to continue to achieve that return, the one with the higher risk is more likely to fail at some point.

If you are a pure value player like myself, then you simply let the fundamentals tell you when to get out. In my case this will very often be too early by many peoples' standards. So be it, I am not interested in other peoples' standards anyway. I am interested in making money at the lowest possible risk, my way. Each player has to set this level for themselves but I advise strongly that the risk element be borne in mind.

A deep value share, pyad share if you like, represents to me the lowest possible risk in the equity market. If it rises then the value will gradually be outed, but critically, at the same time its risk increases. At some point I am going to leave the party simply because the balance of value/risk has made it unacceptable for me to continue holding. And particularly if I have a large holding, that point is probably going to be much earlier than many other players.

Good. I don't much like most parties anyway and would rather get away from them and make my way alone. I trust only me when it comes to shares and because I trust only me I don't trust myself to be in a share which has become some kind of emotional play because I feel it ought to go further, yet have no real value reasons for this view. And if I can't support a play for sound value reasons, my style, then I don't want to know, however tempting it might appear.

The market is full of people telling everyone what they could have done, would have done, should have done. Refine your value approach to make good profits at the lowest risk. Then stick with it, don't worry about trying to squeeze the last bit of profit out of a situation, that is for the next guy. It is not worth the risk of a big loss, particularly if you invest in a very small number of shares at a time.