Exit Strategy?

Investment Analysis Clubs Saul’s Investing Discussions
#1

I have been working on developing a new investment strategy and have been very dissatisfied with the “common wisdom” I see around the web which is what led me here to this board. (Hi All!)

One topic I am still considering is: what is my exit strategy for an investment?

My own view is very similar to what I have read of Saul’s for this topic. So I am curious to get some feedback on my thoughts about when to sell from everyone here with more experience than myself.

Musings on my personal “exit strategy” for investments:

My preferred investment period is forever which does not mean “never sell.” At a fundamental level, I do not agree with a “never sell” philosophy of investing. It seems to me more an attempt to make gambling less risky rather than a true understanding of how to earn money via investing in a businesses. However, I am also not a day trader (or short-term trader). I am investing money in profitable businesses, not in market fluctuations.

I am human and make mistakes. When I recognize one of those mistakes I should correct it (sell the stock) and learn from the experience. As I learn from those mistakes I should be making better investment decisions. This should be shown in my portfolio via increased rates of return and longer (average) holding periods.

Similarly, the reason for investing may have changed. The real world will never match my theoretical models. If something has changed in the fundamental reason I invested in this stock, the investment must be reevaluated. The results of this reevaluation should be used to answer the question, “Is my money better served in this stock or a different investment?”

I have time and interest for tracking at most 20 - 30 investments, assuming I am actively following each. If I am at a point where I do not feel comfortable tracking an additional company when I see a new opportunity, this may be an indication it is time to sell an investment with low potential returns.

An investment should have a rate of return that justifies my effort tracking the investment. Similar to the above but worth a special note: In the realm of investing I have a convenient benchmark to determine if I am getting an acceptable return on my money: If the investment is not generating a return greater than a stock market index (e.g. S&P 500), why would I expend the effort needed to track this company when I could simply invest in an index fund? This should be a long-term estimate for the prospects of each, not a 1-year direct comparison.

In summary:

• Sell if I made a mistake.
• Maybe sell if the reason for investing has changed.
• Sell if the money is better invested elsewhere.

Any comments? The above are deliberately broad categories, not specific scenarios. I intend for this to be the starting point for a sanity check (“should I still be invested in this?”) rather than a checklist of sell conditions.

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#2

othalan, I think your broad reasons sound fine, and I don’t think many people would argue with them.

But, frankly, the devil is in the details. Occasionally it’s very clear when a thesis has broken or that we’ve made a mistake, but far more often the early signs are small and subtle. It usually requires a lot of judgement and separation from our emotions and natural biases. I think this is one of the areas where experience helps, as we begin to recognize patterns and note that a situation with company A looks very similar to what company B went through a few years ago (whether that makes us more positive or more negative about the situation).

One more thing I’d add is that it doesn’t have to be an all or nothing decision: portfolio allocation is a very powerful tool that lets you fine-tune your exposure based on your assessment of the situation.

Neil

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#3

Wow, othalan, reading what you’ve written is like hearing myself think. If you haven’t already, I beg you to read the Knowledgebase which covers my thoughts on exiting extensively.

Best

Saul

For Knowledgebase for this board
please go to Post #9939.

A link to the Knowledgebase is also at the top of the Announcements column
on the right side of every page on this board

#4

nevercontent,
Thank you for your thoughts. I’m certain I am stating nothing revolutionary, I am simply looking to clarify my investing strategy before I dive in. When to sell doesn’t seem to be talked about much in long-term investing from what I’ve read so far.

I agree the devil is in the details. I don’t think I can accurately account for those details given my limited experience. I am trying to consider how I can best setup a framework where I encourages myself to learn from my mistakes rather than feeling I failed in an investment. So perhaps a good addition to my exit strategy would be to consider: what warning signs should prompt me to look closer at the company to evaluate if I should hold, sell or decrease my position? That may help me build up that experience more deliberately. Your comment on company A vs company B makes me think I should also write out my thoughts (at least at first) and compare notes.

Good point on reallocation, I did not address that. My intention is to normally have no more than 15% in any one stock, or perhaps 20% with a VERY good reason. I haven’t done much partial selling to keep that balance, I need to make a specific note of that to keep it in mind!

Saul,
I have read your Knowledgebase multiple times now (thank you for putting it together). I am asking on this board mostly because my instinct for how I want to invest aligns fairly well with your own strategy. Probably why it sounds familiar, though I wrote the first draft before discovering your board.

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