This is a critical decision, which you will face sooner or later. The ideal answer is: Never! But realistically speaking, there are situations where you find selling a business (or part of it) is the best action to take.
What makes selling a business feasible? Remember the attributes we focused upon when picking a winning stock: A wonderful business at an attractive price.
Businesses change, like everything else in life, to the better or, sometimes, to the worse. In other words, if one of your businesses has stopped to be wonderful, it’s time to jump off the wagon! We do not fall in love with shares. We check emotions out at the door. No matter how much you like the business, if its financial performance starts getting out of shape for few quarters in a raw, and there’s no clear sign of improvement, you should leave.
Now, here’s another dilemma: Do you sell no matter what? Do you short the stock and incur a loss? Of course not! As an Intelligent Investor, you sniff such changes early on, so that you sell before the share price goes into a free fall. For you, the worst case scenario should be to retrieve your initial investment fully, and come out even.
This requires continuous monitoring of your portfolio, and being on top of major market movements. You don’t have to spend hours every day following financial news though. That would defeat the purpose of being an Intelligent Investor! All you need is a sense of the market pulse, and a good overall knowledge of the businesses that make up your portfolio.
There is another reason to sell a business: Maturity. But how would you know if a business has reached its peak? No one can answer that question for sure. What we can do is to consult our financial plan and strategy. You don’t have to reap the maximum possible profit of each and every business you engage in! That is almost impossible. You must draw a line at some point and sell when your business reaches maturity based upon your educated opinion at that stage. Getting out with, say, 75% profit is much better than waiting too long, and having to short the stock at a loss.
And if you decide to wait for every business to reach its peak (which you don’t know when for sure), you definitely run the risk of losing money when the wind blows against your ship. So being somewhat on the defensive side is better here, considering the bigger scope of your long-term financial strategy. Remember Rule Number One: Never Lose Money. To adhere to that rule, it’s OK to pass on some extra profits, as long as you end each financial year up in the black…
There are exceptions of course. If your monitoring tells you that a business is destined for 300% net profit, you may want to wait and sell then. But check your risk tolerance first 🙂
After all, no matter how much monitoring, planning, and calculations you make, leave some space for your own common sense, gut feeling and inner wisdom. Yes, ask for higher guidance, when human tools fail to help you make a decision. I guess you know what I’m trying to say here.
Finally, as long as your money is locked in shares, it’s paper money. Eventually, you need to sell and convert that paper money into real money. But don’t go and sell your whole portfolio all together! Only sell those businesses that either stop to be wonderful, or those that reach maturity based on your best possible logical judgment and heart-driven, spiritually guided inner wisdom.
Till the next post, happy and prosperous investing. Don’t forget to have fun along the way, eh…
The Wealth Maker