To hold on to shares or to sell now !
Unlike the environment that the world’s greatest investor Warren Buffett enjoys – a population that is almost 14 times greater than Australia’s 22 million – our companies eventually saturate their market and growth slows. Companies that continue to retain profits when they reach this point, with the aim of diversifying away from their core expertise or in the hope of garnering the market’s attention through acquisitions, have a poor track record of maintaining their previous rate of value appreciation and wealth creation.
There are, however, four reasons to sell.
1 The first cause for a reassessment is when I am wrong. Unsurprisingly, I am prone to making errors of both omission and commission. The objective is to minimise their frequency and the magnitude of their impact.
The information in an annual report – while it is usually reliable, companies still make all kinds of announcements between the release of those reports that are not subject to the same scrutiny and it is here that information can be mirage-like in its opacity.
2 The second reason to sell is when the grass is greener elsewhere. Australian companies do eventually run out of opportunities for value accretion and another company may offer the opportunity to increase in intrinsic value at a faster rate. (Alternatively, another company may simply offer much better value.)
In these circumstances a sale is overdue and “greener” grass is offered by the shares of another.
Buffett’s sale of Johnson & Johnson – a good company - to participate in the special issues of Goldman Sachs and General Electric is an example of this kind of selling. If you recall, Berkshire Hathaway sold off the pharmaceuticals giant to participate in refinancing exercises at both Goldman Sachs investment bank and the General Electric conglomerate during the depths of the global financial crisis.
3 The third reason to sell is when the company in whose shares you are invested have simply rallied too far beyond intrinsic value. This is a relatively recent revelation for me.
4 The final reason for selling is an observed deterioration in any of the factors that caused one to acquire the shares in the first place. If the outlook for the company’s prospects change adversely or if management act in away that does not reflect a shareholder orientation – for example, they grant themselves excessive options, pay themselves a salary beyond their ability, engage in nepotism or make dumb capital allocation decisions – then a reason for selling is triggered.
Full Article By Roger Montogemery can be read here – > Eureka Report