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Evaluation Over Emotion When Deciding When to Sell

Taking the emotion out of the response to market changes by trusting our investment thesis.

September 22, 2021

There are certain things I look for when I invest in a company – what the company does and whether that provides value to its customers, how well the company is run and company leadership, and how large the addressable market is to assess potential growth. These are the check boxes that go into my investment thesis. I spend a lot of time getting to know the company to the best of my ability and ask myself whether it’s a product I want and/or a company I would want to work for. Once I do that assessment and apply my internal gut check I’ll make the investment.

I also realize that businesses are not held to that snapshot in time in which I do my evaluation. Things change, environments change, and markets change. Many times, these changes are beyond the control of the company. When the company has strong leadership and an agile company culture, the business can usually ride out the changes. Its stock price may reflect the stock market’s fear of change, but I believe a well-run company, with a great product that fulfills a market need, can bounce back once the market’s fear subsides.

Unfortunately, there are sometimes internal changes a company makes, like bringing in new leadership or not investing in the quality of its products, that make me reevaluate the company against my thesis and my core considerations when investing in a business. When that situation arises, I may consider selling my position following that assessment.

To be completely transparent, I have not sold a position because of a change a company makes. Most of my sales have been to free up funds to invest in something else. But red flags for me would be how the company is being run, determined by looking at net revenue and operating margins, accounts receivable and inventory, and where the business is investing in its business. While I think that a business runs as the collection and collaboration of all of its component parts, and therefore many factors and roles contribute to the success or demise of a business. I think these internal indicators, which can be found in the company’s SEC filings, provide good insight into how the business is doing and whether or not there are changes that are cause for concern.

Another flag for me is the market the business serves and whether there has been a significant change in that market. A company may be able to adjust to the market change, even if that change may take time, and pivot to serve that market, think Eastman Kodak (NYSE: KODK). Sometimes the company resists the change until it is too late, think Blockbuster. Markets change and I do believe that strong leadership will remain aware of potential changes in the market to be prepared for and can lead the company through the pivot.

It’s easy to watch the market and see the minute-by-minute updates on a position. It’s hard to watch as a position falls. Emotions take over and many people sell their position based on that emotion. But we need to remember, there was something besides emotion that led us to invest in that position, our investment thesis. If that still holds, then so should we. But if the company has made changes that we no longer agree with, then it may be time to let go.

Our advisors recently took a closer look at several of our previous 7investing recommendations, and we found a few things we didn’t love. Click here if you’d like to see the specific red flags that we have identified.

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