There are essentially 3 styles of investing, Value, Growth, Trading. Within this there is of course multiple nuances, combinations and variations, but at the top sit these 3 styles.
As a value investor you look to invest in a business that is currently priced at less than its current worth.
However you determine current worth/value (DCF, Asset Replacement, EPV, etc) as a “Value Investor” you must have a value for the share that means you can say that it is worth more today than it can be bought for and as such this “value” or some factor of it, say 90%, is the point at which the gap is closed and you would sell.
Value investors do not hold shares for the long term they hold them until the shares near their calculated value and then they sell them. Now getting the shares to fair value may take some time, in fact it is likely to take some time, so Value is not usually an in and out trade, but one that can take years or months. And whilst you hold the share you may see the value increase so you adjust the price at which you would sell. But fundamentally you are selling when the share gets to the price you have valued it at. If you don’t have a “Value” going in your not a Value Investor.
The Growth Investor does not inherently see the share as mispriced on current value. The Growth investor sees the opportunity in the share as being in the future. For whatever combination of factors the company is in a position to grow profits at a more significant rate than is currently priced by the market. There are all sorts of reasons why this might be but at a fundamental level the growth investor is planning to ride the future success of the company as it delivers on its current promise. This is the home of the long term buy and hold investor. Personally I do price shares I place in this category. So if I think a share is worth £3 and someone wants to offer me £4 I will take it. But largely when a share that I see as a growth share moves to £3 on a £3 valuation I will look at what price I bought, whether it has been delivering on the growth story and usually rerate the share to £3.20 and see if it can hit this figure. And when it gets to £3.20 I will review and most likely move to £3.40 rather than sell. Though not always and if there is an offer well above my value I will take it.
The Trader isn’t buying the share because of any inherent quality of the company. As a trader you buy for mechanical eg the 15 day average has crossed the 30 day average moving up, or the psychological – the current news is poor and the market normally oversells and bounces a little thereafter. Depending on the strategy you use you either have a sale price built into the strategy or you trend follow and you sell at the trend change point.
None of these are wrong and none of these are correct they are all simply different ways to invest. Though I do believe that different styles suit different people, both with regard to their experience and mindset.
Depending on your approach each strategy may also all be applied at different or sometimes the same time to a company. As an example there is a company that I have written about before, Arbuthnott Banking Group – Ticker ARBB. I have been and remain an investor in this business.
I originally bought shares in ARBB as its holding in Secure Trust Bank was worth in excess of £274m and ARBB had a market cap of only £200m. On this basis alone the company was trading at more than a 25% discount to assets and at the time there were other parts to ARBB that I felt added to the valuation and I was getting for free.
The shares traded at about £14 in September 2016. Since then the company has sold a significant part of its holding in STB and paid to the shareholders a £3 dividend. Yet the shares (after some volatility) still trade at around £14. The majority of the undervaluation has been paid to me. So I no longer see these shares as a Value Play and have reduced my holding.
But what I have seen is a management team that have been able to take capital and have very successfully allocated it to buying and growing financial assets and they have now got a pile of cash that they are beginning to deploy. ARBB has to my mind become a growth opportunity underpinned by a strong asset base. So I am still holding with the growth story in mind. Though may reduce further as the growth story develops given my relative weighting in ARBB.
What is also true is that ARBB looks to be one share that following the 15/30day MA trading strategy works on. It doesn’t tend to bounce in and out of but once crossed the trends run for some time. Often 2-3 months at a go.
So as a Value Investor I have a price that I will sell at before I invest.
As a Growth Investor I have a price that I will review for a sale at when reached.
As a trader I will sell should my trading strategy say sell.
Alongside this there are three other factors that cause me to sell a share
1 – If I realise I have made a mistake. The investment thesis was not what I thought it was and I should not have bought. If I realise this I sell. This is often tough as it requires me to admit I made a mistake.
2 – If I am short of cash and realise I have a better investment to make. With this you have to factor in transaction costs and it is something I have seldom done, but it is at least in theory a factor as to why one would sell.
3 – If I feel that a holding has become too large a position I will sell part. Personally I don’t like to hold over 5% on a cost or 10% on a portfolio value basis in any one share. I am not strict on this, but certainly look very carefully at holdings once past 10%.
I would be remiss to also not mention that some sell on stop losses, whether preset with their broker or kept in their own calculation. It is not something I routinely do, given most of my holdings are value orientated, but there are many other good investors that swear by it. I would simply say that this scheme as it sets a potential sale price on entry also means that you know when you might sell. A stop loss that you move down is not a stop loss.
This is of course only my approach there are others and there are certainly variations on mine. But as one of the keys to successful investing is too have an approach that does not cause you too much stress having a reasonably clear idea as to when to sell is to me very helpful.