Never say Never.
This article comes at a time when 13 out of 27 stocks currently in The Buylyst Portfolio have either far exceeded their “Target Price” or are hovering around it. And that’s not counting the stocks we’ve already sold in the past. For the ones we haven’t, should we sell and take profits?
“The best time to sell is never”, Buffett quipped (apocryphally). Of course, as with most things he says, there are many layers hidden below the folksy charm. But it’s a question that confounds investors and traders alike. Investors – people who take long-term bets on the business as opposed to short-term bets on stock prices – should be less confounded. If they’re truly “investors”, they would have a good estimate of how much a business – and consequently its stock – is worth.
Like most long-term investors, at The Buylyst we put in a lot of work into estimating the intrinsic value of the business. We’re, of course, fully aware that valuation is not a science. We know that Intrinsic Value is not a law of nature. It is a guesstimate, to put it crudely. Here’s our best shot at translating Intrinsic Value into plain English:
It’s our estimate of what the business is worth when we buy a company or its stock. It helps us estimate a price at which we would buy, which would be significantly lower than what it’s worth – its intrinsic value.
Now, what happens when the stock price appreciates to the Intrinsic Value? Do we sell? But doesn’t Buffett imply that we should never sell. No. Here’s what he means, in my humble opinion:
Ideally, you own a business (or its stock) that has a distinct competitive advantage that’s durable and nurtured by a competent management team. If you do, then you’d probably never want to sell that business. However, sometimes circumstances change – the competitive advantage may no longer be durable (the moat may shrink) or the management team may change or suddenly lose interest in the business. In those cases, SELL!
And obviously we know that Buffett has sold business (or their stocks) in the past. The most recent example is his pandemic-induced selling of Airlines stocks. In his view, airlines won’t get back to normal for a long time – and in that time, some companies can file for bankruptcy. As an equity holder, one’s investment can get wiped out in such cases.
The Airlines episode is a good example of another layer of “when to sell” triggers that we, at The Buylyst, give a lot of thought – our Worldview. Sometimes circumstances change permanently. Sometimes the sport that the company’s playing changes drastically. That’s why, before we invest, we spend a lot of time and effort on trying to answer the question, “is the company playing the right sport?”
“When the facts change, I change my mind. What do you do, sir?”, said John Maynard Keynes (again, apocryphally). In the last few months, we’ve changed our minds when the facts changed – 3 times:
- We focused on cash flow margin of safety when the pandemic hit us. So, we had to get rid of a couple of our investments.
- We sized up our China exposure, mostly because that epic trade deal never happens, and considering that it’s an election year in the US, politics can get crazier. We shifted around some of our portfolio allocations in order to reduce our China Risk.
- We offloaded Intel, because we saw Apple’s decision to transition away from Intel Chips as a much bigger issue than the mere short-term revenue impact for Intel would indicate.
While we buy a company (via its stock) because…
- It’s playing the right sport.
- Its competitive advantage is distinct and durable.
- Its Management Team is competent.
- It’s trading at a price well below our estimate of Intrinsic Value.
…we sell a company (it’s stock) because:
- The world changed and the sport it’s playing is in jeopardy.
- Its competitive advantage is no longer durable.
- It’s Management Team has either changed or no longer seems interested.
- It’s now trading at too high a price – much above our estimate of intrinsic value.
We can sell for one or more reasons, or all of them. But #4 comes with some caveats. We’ll be discussing them along with examples from our Portfolio.