I can’t already be thinking of selling my Scottish Mortgage (LSE: SMT) shares, can I? I only bought them a few weeks ago, and I’m a long-term investor.
Well, I’m not actually planning to sell already. But knowing when to sell is one of the toughest investing decisions there is, and I’m not good at it. Looking at the reasons I bought into the investment trust makes me realise I need to get better.
Why would an investor with a long-term horizon be thinking of selling at all? After all, ace long-term investor Warren Buffett reckons the ideal holding period is ‘forever’. But even he sells sometimes, when it makes sense.
And it generally makes sense when something has changed, when something has gone wrong. Specifically, I reckon we should always consider selling when the reasons we bought in the first place no longer apply.
So why did I buy Scottish Mortgage shares? It’s quite simple really. I thought they were undervalued.
Value investing
However we choose to measure it, value investing is all about buying shares when their valuation is lower than we think it should be. And I thought the Scottish Mortgage valuation was way too low. How did I judge it?
The trust invests heavily in US Nasdaq stocks. And that index crashed into bear market territory recently. In fact, from a peak, the tech-heavy Nasdaq lost around 30% of its value.
US investors typically afford higher fundamental valuations to their companies than we do in the UK. But even so, I really had thought Nasdaq stocks were overvalued. And then a lot of them suddenly looked undervalued.
Fallen too far
When the fall happened, Scottish Mortgage shares naturally fell too. In fact, they fell further, and the discount widened. That means the shares became valued even lower compared to the underlying assets held by the trust.
It was a no-brainer buy for me at the time, and I’ve enjoyed a small price rise since. But this kind of investment is unusual for me, and I will eventually need to decide when to sell.
With dividend shares, it’s easy. If the dividend is cut, and I’m not getting a good yield on my purchase price, it might be time to sell. There are always other good dividend shares out there for me to buy.
When value is out
A key part of value investing is to sell when the value has been outed, and go look for the next undervalued investment. But the tiny Scottish Mortgage dividends won’t help me decide.
So I need to work on selling them when I think the underlying Nasdaq stock has once again become overvalued, assuming that happens. So maybe I’ll work out a Nasdaq price-to-earnings (P/E) multiple that I rate as the overvaluation limit, and dump my Scottish Mortgage shares when the index breaks through that.
Or I could just forget about the valuation, keep them for the next decade or more, and only sell when I retire and need the money. That might be much simpler.
