Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Are you brave enough to sell an investment when circumstances change?
One of the best investing skills is the ability to weigh up the evidence in hand and not be swayed by preconceptions or be so emotionally attached that you fail to recognise deterioration in the investment case.
Not being obsessed with a specific stock can often help you make an important decision to sell if circumstances have changed.
You should never be embarrassed about putting your hand up and admitting defeat with a losing trade. Recognising that something has gone wrong could help you make more considered investment decisions in the future. It also shows you are willing to move on and not sit tight praying for a recovery.
Even making the decision to exit a profitable trade shows you have given thought to an investment’s situation, hopefully examining the facts in hand and considering the potential upside or downside in the future.
Challenging yourself and asking why you should continue to hold something is as important as questioning why should make a new investment in the first place.
With this thought process in mind, I am always interested to discover why fund managers decide to sell certain stocks. Fortunately many managers are open about their actions, and so they should be.
They are being paid by investors to manage money and should therefore be transparent with their actions and thought process. After all, would you trust someone if they didn’t explain what they were doing with your money?
For example, Keith Ashworth-Lord, fund manager of CFP SDL UK Buffettology Fund (BF0LDZ3) has been fairly frank with his decision to dump Domino’s Pizza (DOM). The position was exited after Domino’s disappointed with recent like-for-like sales, even though the World Cup should have given it a trading boost.
‘I have been getting increasingly wary of this business recently,’ he says. ‘Domino’s is becoming more capital intensive, cash conversion has started to tail off and debt levels increase. I have doubts about the international expansion and lastly the CEO has gone through three finance directors in four years. We therefore sold the entire holding.’
Other examples of getting out when circumstances have changed include Mid-Wynd International Investment Trust (MWY) fund manager Alex Illingworth selling his position in Chinese tech giant Tencent. The Chinese government has recently labelled one of Tencent’s games as ‘poison’ and blocked the sale of another of its games.
‘Analyst growth rates, to our mind, had not readjusted down enough and we were concerned that this heightened regulation was likely to stymie the growth rate for a while,’ explains Illingworth.
Leigh Himsworth sold his position in Sainsbury’s (SBRY) earlier this year from Fidelity UK Opportunities Fund (BH7HNZ8) as he was worried about management being distracted for a potentially long time while a tie-up with Asda was scrutinised by the competition authorities.
Having the discipline to weigh up positive and negative factors with existing investments should hopefully lead to better portfolio decisions. If you can only see positive factors, ask a fellow investor if they can see any negatives so you can help form a more balanced view. Having someone challenge your views can be refreshing and potentially make you see investments in a different light. (DC)