Ah, the benefit of hindsight. One of the best-performing blue-chip shares this year has been aeronautical engineer Rolls-Royce (LSE: RR). Since the start of 2023, Rolls-Royce shares are up 196%. That means they have almost tripled in price.
Over the long term, things have been less impressive. Still, after years of weak performance, the shares are now 5% higher than they were five years ago.
But I sold my shares earlier in the year and have no stake in Rolls-Royce at this point. Was this the worst investing decision I made in 2023?
How great investors think
It is tempting to say that only time will tell.
But I am not convinced that is right. Many great investors do not judge their own performance only in terms of what actually ended up happening. They also consider the quality of their decision-making process.
That is why billionaire Warren Buffett talks about “mistakes of omission” as well as “mistakes of commission”.
In other words, he thinks he has erred when failing to do something in the stock market that he had the knowledge and experience to believe was an excellent move, no matter how things subsequently turned out.
Indeed, addressing shareholders of his company Berkshire Hathaway, Buffett went as far as to say, “the mistakes that have been most extreme in Berkshire’s history are mistakes of omission. They don’t show up in our figures. They show up in opportunity costs.”
Full throttle
Certainly, Rolls-Royce looks in better shape than it did at the beginning of the year. A new boss has set ambitious financial targets, taken a knife to costs and continues to streamline the business.
But the shares have almost tripled in value. Is the business really worth three times as much as it was back in January?
The answer could be yes. In fact, Rolls may conceivably end up being worth even more than its current valuation suggests. The company benefits from a large installed customer base, iconic brand, limited competition and revived demand for civil aviation. New engines it is developing may fuel growth for decades to come.
Taking money off the table
Despite that, I do not feel I made a mistake by cashing in my shares. I made a judgement about how I perceive the value of the company relative to its share price.
Investing is all about such judgements.
We buy shares because we think the amount we pay for them today (when considering the cost of the money involved) is lower than the likely future value of the shares including any dividends they pay while we own them.
I see a lot of potential in the business, which is why I bought in the first place.
But I also see risks. As the shares have shot up in price, I think their valuation looks increasingly focused on the potential, not the risks.
Civil aviation demand has a habit of suddenly dropping overnight from time to time, for reasons totally outside of Rolls-Royce’s control. Cost-cutting can help a company’s bottom line but it can hurt employee morale and ultimately product quality, as was seen at Boeing over the past couple of decades.
On that basis, I do not regret selling as the price soared.
