VALUE INVESTING
Selling And Wet Fish

By Stephen Bland (TMFPyad)
November 11, 2005

The old favourite question of when to sell value shares has cropped up again on the value board. But I am not criticising anyone for asking it, on the contrary it is a good question that any beginner wishing to trade value shares needs to raise.

Somewhat perversely perhaps, with value, selling can be a harder decision than buying. The reason is that finding a good value share is usually pretty clear when you do so. It's like being slapped round the face with a wet haddock. You can't easily miss it but it doesn't happen that often. The last time anyone did that to me was at least a couple of weeks ago and anyway it was a cod not a haddock. So buying is often quite a straightforward decision. But selling? That's enough to cause a bit of a headache for some.

My usual answer to the timing of disposals is that you sell when the share ceases to display sufficient value to justify its continuing retention by your criteria. And that point will vary quite a lot from one value player to another. The reason for this is to hold the share for only its lowest risk period, that is, while it is a value share. Once it slips out of the value net, let the next guy have it. He's holding it a higher risk. Sure it may go on to do very well. But if it does, it won't be as a value share but as a more normally rated share. As a value player, you don't want to be holding normal shares, you should be holding only value shares.

Note that this loss of value can occur where the share is showing either a profit or a loss, though I suggest that the former position is marginally the more desirable. You're likely to sell at a loss only if the fundamentals upon which you bought deteriorate subsequently which can happen.

You bought the share according to your personal value story. This means relatively cheap fundamentals coupled with some reason to believe they are too cheap and therefore at some future date are likely to be re-rated. When the story is no longer true, it's time to leave. In practice you watch for the exit as soon as you have bought the share, monitoring for changes in the fundamentals because you never know when the outing can come. A couple of days, a couple of years, whenever. Often, the timing is unexpected. The share can lie idle for a long time, frustrating you with its immobility, then something wakes it up. This is particularly the case with small caps.

Don't forget you are working to a strategy that has a set of rules. Don't try to bend them totally out of shape. It can be tempting I know. A share going up smartly that has divested itself of its value may seduce you into thinking that it may well go up a bit more so you should hang on. A case of recent events syndrome. Forget about price movements or what you paid for the share. Does it have sufficient value now or not? That is the question and that is the only question.

Part of the problem is the almost irresistible desire to look back after you've sold to see whether you would have done better or worse by hanging on, then either wallowing in self congratulation or going out and hanging yourself. My advice has always been to never look back. Once you've sold a share it has gone and you should not take any interest in its movements after that.

Most of us will do so sometimes however and if you find that the current price is significantly different to when you sold, reign in the emotional response and go back to the rules. This is a strategy which means a set of rules. Those rules are designed to maximise profits and minimise risk. If you want to be a gut trader, then fine if you're one of the tiny minority for whom that works. But then you won't be reading this anyway. Otherwise, you need to stick with the strategy. By all means refine it to suit your personal style but not so much that it takes you right away from value. At least not if you want to be a value player.