- January 31, 2025
- Posted by: CFA Society India
- Category:BLOG, Events
Speaker - Kuntal Shah, Partner, Oaklane Capital
Moderated by - Jiten Parmar, Partner, Aurum Capital
Contributed by - Ajay Minocha, CFA, Member, Public Awareness Committee, CFA Society India
The session “Art of selling”, delivered at the 8th Value Investing Pioneers Summit (VIPS) organised by CFA Society India, explored the overlooked yet vital skill of selling in investing. The common focus in financial education and practice is on buying—what to buy, when to buy, and strategies for acquisition. Selling, however, is treated as secondary, often neglected in both theory and practice.
The session began with the quote, “Well bought is half sold” by Howard Marks, emphasizing the interplay between buying and selling. The art of selling determines the ultimate success or failure of an investment journey, as profits are only realized through effective exits.
Challenges and Emotional Barriers in Selling
Investors face numerous obstacles when selling, many of which stem from emotional and psychological barriers:
- Seller’s Remorse: Selling an asset early, only to see its price rise later, induces regret. Conversely, selling before a significant downturn may lead to a false sense of pride but still affect long-term decision-making.
- Anchoring and Loss Aversion: Investors often anchor their decisions to purchase prices, refusing to sell losing investments in hopes of recovery.
- Disposition Effect: This bias leads investors to sell winners prematurely to lock in profits while holding onto losers longer, hoping for a turnaround.
Kuntal highlighted the fundamental truth: “You can’t get all decisions right—avoiding blow-ups is more important.” This statement underscores the importance of managing losses and focusing on capital preservation.
The Importance of Selling
Kuntal asserted that selling is as crucial as buying, but its complexity arises from the multiplicity of factors involved. While there is only one reason to buy—to gain future value—there are many reasons to sell. These include fundamental changes in a business, overvaluation, portfolio rebalancing, personal liquidity needs, and broader market dynamics.
He sighted John Neff’s statement, “The toughest investment decision is the decision to sell,” reinforcing the point that selling requires greater scrutiny and emotional resilience. Unlike buying, which is often driven by optimism and opportunity, selling necessitates a confrontation with uncertainty and potential loss.
Investor Archetypes and Selling Behaviour
The presentation describes various investor archetypes, likened to animals, to illustrate differing buying and selling behaviour’s:
- Connoisseurs: Focused on quality investments, they sell losers quickly and hold onto winners for extended periods.
- Raiders: Engage in quick trades, often booking profits prematurely and leaving money on the table.
- Assassins: Set stop-losses at purchase and sell unemotionally when these thresholds are breached.
- Sheep: Follow the herd, buying and selling based on market sentiment without independent analysis.
- Ostriches: Ignore negative cues, holding onto losses instead of selling decisively.
These archetypes illustrate how selling strategies are influenced by individual psychology, market behaviour, and risk tolerance. They also highlight the pitfalls of reactive or emotionally driven decision-making.
Lessons from Legendary Investors
The session provided case studies of renowned investors to underscore the complexity of selling. The examples highlight that even the most successful investors err in their selling decisions, underscoring the need for humility, continuous learning, and disciplined frameworks.
When to Sell: Key Triggers and Criteria
The session provided the participants with a comprehensive list of reasons to sell:
- Fundamental Deterioration: Changes in the business model, competitive positioning, or management integrity.
- Valuation Concerns: Extreme overvaluation, where prices far exceed reasonable expectations of future performance.
- Portfolio Management: Reducing exposure to oversized positions to manage risk.
- Personal or Tactical Needs: Liquidity requirements, alternative investment opportunities, or tax considerations.
The session emphasized that “buy-and-hold” investing does not mean holding indefinitely. Historical examples, such as the stagnation of Japan’s Nikkei 225 index for 34 years and the 25-year recovery of the Dow Jones post-1929, demonstrate the risks of clinging to underperforming assets.
Market Cycles and Selling Opportunities
The session highlighted the importance of aligning selling decisions with market cycles:
- Bull Markets: Offer opportunities to trim positions and lock in gains while valuations are high.
- Bear Markets: Expose weaknesses in business fundamentals, necessitating disciplined exits.
Historical bubbles, such as the Nifty Fifty stocks of the 1970s and the Japanese asset bubble of the 1980s, serve as cautionary tales of holding through speculative peaks. Investors who failed to sell during these periods faced prolonged recoveries or permanent losses.
Practical Tools and Frameworks for Selling
To overcome the challenges of selling, Kuntal recommended several practical tools:
- Decision Journals: Documenting the rationale behind investment decisions to evaluate outcomes objectively and learn from mistakes.
- Stop-Loss Mechanisms: Automating sell orders at predetermined loss thresholds to prevent emotional decision-making.
- Tax Harvesting: Using realized losses to offset gains, reducing tax liabilities and improving net returns.
- Valuation Metrics: Regularly reassessing assets against benchmarks like earnings growth, industry trends, and macroeconomic conditions.
The session also emphasized the importance of “switching”—redeploying capital from low-performing investments to higher-potential opportunities. However, this requires careful analysis to balance the risks and rewards of both the sale and the new purchase.
Key Takeaways and Closing Thoughts
- Selling requires the same, if not greater, rigor as buying.
- The reasons to sell often mirror the reasons to buy—when the initial investment thesis no longer holds, it’s time to exit.
- Emotional biases, such as regret and loss aversion, must be managed through disciplined frameworks and objective analysis.
Market conditions and cycles significantly influence selling opportunities; timing is critical to avoid prolonged recoveries or permanent losses.