Overview – The Importance of Knowing When to Move On in Investing
One of the hardest tasks that an investor will have to face is knowing when to persist or when it’s time to throw in the towel.
It’s tempting to believe that an investor can persevere through any hardship they come across, but such a mindset is quite naïve and can do more harm than good. Just because you spend a large amount of time and energy trying to improve or fix something doesn’t necessarily mean things will get better.
As you may have experienced in your personal life, there are instances when choosing to let go is the healthier choice than choosing to stay and try to fix something that is clearly irreparable. I won’t go into specific situations, but chances are at least one experience in your own life comes to mind.
Investing is no different. There will be times when your best option is simply to cut your losses and move on to greener pastures. However, making the decision to move on is much easier said than done.
Not Every Potential Investment Will End Up in Your Portfolio
When I first started investing, it was tempting to think that every stock I came across was a potential addition to my portfolio. All it took was one annual report and I would convince myself that this company would be a good addition to my portfolio. Nothing was more satisfying to me than seeing the number of shares I held grow in number.
My hastiness to add anything I possibly could to my portfolio led me to purchase shares in Maple Leaf Foods. I held these shares for just over a year before I decided to sell them.
Looking back on those early days, I learned a very painful yet indispensable lesson: not every potential investment I come across will eventually make its way into my portfolio. Sometimes, after performing preliminary investment analysis, or even in-depth analysis, you may reach the conclusion that a prospect isn’t worth pursuing any further.
I’ve previously shared my analytical framework, which I broke down into three parts. Throughout those articles, I mentioned that no prospective investment is safe from disqualification – just because a prospect reaches the final analysis stage doesn’t mean it’ll end up in my portfolio. The thought of disqualifying a prospect after making it so far isn’t an option many investors would happily consider.
We are all subject to the cognitive bias of loss aversion, that is, the pain of losing something has a greater psychological impact than the pleasure of gaining something. Put another way, our innate motivation to move forward isn’t because we crave success, but rather because we fear failure.
Nobody wants to spend several hours analyzing a prospective investment only to end up discarding it, but this is the reality every investor deals with and must accept. In my analytical framework, I shared the ways I use to narrow down my list of prospects as much as possible, but there’s no guarantee that I’ll end up making a purchase decision in the end.
Constructing a robust portfolio takes time because excellent investment opportunities are hard to come by. Not every prospective investment you come across will be worth pursuing, that’s why they’re called prospects in the first place.
Knowing when to disqualify a prospect and move on to another one is a difficult decision to make, but one that must be done. The sooner an investor accepts the reality that a prospect is a poor fit for them, the sooner they can find one that ends up in their portfolio.
Coming to Terms with Divesting
Every investor has a specific strategy when it comes to how long they plan to hold onto their investments. Some like to sell as soon as prices increase to pocket a capital gain, whereas others like to hold on for as long as possible to continue receiving dividends/interest payments. Warren Buffett famously stated that his favourite holding period is “forever”.
Regardless of your specific investment strategies, it’s only a matter of time before an investor must consider the option of divesting. Although Warren Buffett’s favourite holding period is “forever”, that doesn’t mean he has never divested in his career. At the height of the COVID pandemic, Warren Buffett sold all of his airline holdings in May 2020.
In Berkshire Hathaway’s annual reports, Buffett also elaborates that just because he likes to buy and hold doesn’t mean he will never sell – there’s a difference between a preference to hold forever and an obligation to do so.
From a psychological standpoint, it makes sense as to why some investors are reluctant to divest. Recall our earlier discussion about loss aversion: the pain of losing something is psychologically more impactful than the pleasure of gaining something. This can be made worse by the fact that sometimes an investor may need to divest but end up selling at a loss.
When I sold my shares of Maple Leaf Foods, I sold them at a loss to the tune of about $50 CAD. Now, this loss isn’t astronomical by any stretch of the imagination, but it still hurt me knowing that my hasty decision to pick up shares of Maple Leaf Foods ultimately ended like this.
Looking back, I’m glad that I divested, but it certainly still leaves a bad taste in my mouth whenever I think about it.
It would be naïve to think that you will never have to sell any of your investments. Many investors dream of taking a “buy and forget” approach, but no investment is safe from the possibility of divestiture – the constant evolution of investment risk means an investor will always need to reassess their holdings occasionally.
Divesting is a completely natural thing to do as investors do it all the time. Even investors who are faithful to the “buy and hold” philosophy, such as Warren Buffett and Seth Klarman, perform divestitures from time to time.
So, the next time you face the possibility of needing to sell, understand that it’s alright to do so and that it may ultimately be the best decision you can make at that time.
Persevere or Look for Greener Pastures?
There will be times throughout your investing career when you will be forced to ask this question: “should I keep persevering or is it better if I move on to greener pastures?”
Of course, this question isn’t exclusive to investing, but the point is this is a question that almost all investors will inevitably need to answer someday. I was faced with this question when I realized that Maple Leaf Foods wasn’t as great of an addition to my portfolio as I previously thought, and I know I will encounter it again in the future.
Now, I’m not going to convince you to pick one option over the other. Instead, my purpose of bringing this up is simply that – to remind you that it’s only a matter of time before you encounter this question and must provide an answer. You can choose to defer answering this question, but you’re only doing yourself a disservice by prolonging the inevitable.
Wrapping Up
Knowing when to move on is never an easy decision to make, but unfortunately, investors aren’t spared from having to make this decision someday.
Understand that it’s totally fine to let go of things that no longer benefit you and end up being detrimental. It’s not unheard of for people to move on from things certain affairs in their personal lives, so what’s stopping an investor from moving on as well?
Not every prospective investment you analyze will end up in your portfolio, nor will every holding you currently have stay in your portfolio forever. However, learning to let go is something investors must learn to be comfortable with.
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