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Investor’s Dilemma: To Sell or Not to Sell, That Is the Question

There is much truth in book values skewing our approach. I suspect we are all guilty, and in my case it is usually stubborness and dented pride that makes me reluctant to sell things.

Nobody forces us to sell anything, if we’re ungeared. So if I don’t like the market price of a share I hold, then I ignore the market price as being unsatisfactory. What’s wrong with holding? Especially if there’s a dividend to look forward to every 6 months.

However, as it is a quiet day I thought I would make the case for holding on to your “losers”.

  1. Capital losses are extremely useful.
    One of the major advantages of single stock investing over funds/trackers is that you have much greater control over your Capital Gains Tax (CGT) situation. You can choose when to recognise your losses and offset gains to minimise your CGT bill – especially if you have a spouse or gains on property etc. Yes, I’ve heard “Don’t let the tax tail wag the investment dog”, and frankly in many scenarios it is terrible advice.
  2. Bombed out shares have “option value”.
    The upside can be immense, whereas you’ve already taken the loss so there is an assymetry of risk (often exacerbated by others dumping their small holdings). Cleaning them out because you don’t want messy small holdings is often a mistake – anyone who has held on to Centrica (LON:CNA) in recent years will vouch for this.
  3. Book values don’t reflect dividend income
    My spreadsheet has a separate column to show cumulative income over the holding period. I have many holdings where the P&L looks anaemic until you take into account divis & special divis. Legal & General (LON:LGEN) is a good example. Just make sure you hold these in your ISA/SIPP. Stockopedia subscribers are very poorly served here as all the charts are price only, rather than total return – and it makes an immense difference (as anyone who is familiar with Bloomberg’s TRA functionality will attest). Dividend compounding matters over any multi-year horizon.
  4. Reversion to mean
    This may not be a popular opinion…but none of us are clairvoyant geniuses and there is a lot management don’t know, let alone investors. If you’ve just experienced some bad luck with a share (as opposed to a fundamental fault with the company/management coming to light) then it makes little sense to sell because of some arbitrary stop-loss…you will have to re-invest the proceeds in another company. Are you jumping off one sinking ship (where the management have at least started to plug the hole) onto another where the management have yet to even spot the rocks?

A few years ago, I decided that staring at profit & loss figures every day was clouding my judgement. So I removed the columns in my spreadsheet showing the original cost, and the running profit/loss on each position. I found this greatly helped my decision-making. Instead of worrying about positions in the red, and gratefully selling them if they got back to breakeven, instead I focused on the fundamentals of each company, and the prospects. Is it decent value at the current price, with a reasonable outlook & balance sheet, and hence worth holding? If so, then my decision is to remain a holder, and my original buying price is totally irrelevant. That’s something worth thinking about. Equally, if the fundamentals have gone wrong, and I don’t like the value/prospects for the company any more, then it should be sold – and again, my buying price is irrelevant. It’s easier to sell a duff share if you don’t look at your P&L on it.

These arguments of course run contrary to much of what you will read – how to deal with profit warnings etc, and I do like to play devil’s advocate, so take with a pinch of salt.

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Andy

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