Painting the perfect picture – Part 1

I recently sold an investment in DuluxGroup which I had held for a little over 4 years. I was quite pleased with this trade as I made about a 2.5 times return on it and the stock actually fell after I sold it (which made me feel like me an absolute genius, but in reality was just pure luck).

I find picking the price to sell much harder than picking the price to buy. The desire to sell at the top and the uncertainty over the direction of short term prices makes this decision difficult. This conundrum over when to sell has troubled many, including great investors like Phillip Fisher.

For clarity, this applies only when the company’s fundamentals are good and when you are looking to realise the profits from your trade; if the company’s fundamental are bad then that makes the selling decision very easy.

I find having a strategy to sell which is in sync with your overall investment goals makes the decision easier.  As I do not have the ability to consistently sell at the absolute peak, I have come across a few helpful ways to think about when deciding to sell an investment:

  1. If the stock you hold has a strong and durable competitive advantage and your investment goal is to fund your retirement, consider selling down the shares  during your retirement as when you need the funds. Warren Buffet once said “Time is the friend of a wonderful company, the enemy of the mediocre”.
  2. Sell when you find an alternative investment with better potential returns. This is a good strategy if you are fully invested and have found better opportunities.
  3. Sell when the share price exceeds the intrinsic value. This was a method practise religiously by the legendary investor Walter Schloss (who averaged a compound return 16% after fees, compared with 10% for the S&P 500 index).
  4. Once you made the decision to sell, dispose the holdings over a period of time with pre-determined selling dates. This is to even out peaks and though so you get an average price over the period. This was advocated by legendary investor Phillip Fisher.

For growth companies with durable competitive advantage and potential to grow faster than the overall economy over long period of time, my default position is typically (1).

In my next posting, I’ll discuss in more detail my decision to sell DuluxGroup which will hopefully clear up the seemingly irrelevant title for this post…

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