I believe one must be
proactive in life and this holds true for investing as well.
The fact is that one doesn't prosper in the market by
standing still. One gets ahead by being focused, inquisitive
and persevering. Invariably successful research, analysis
and good judgment involve agility, determination and
opportunism. When confronted by an unexpected opportunity
often one must be forceful to make an accelerated decision
without necessarily possessing all the facts. In practise
one must stick to one's investment disciplines and
analytical convictions. These points are particularly
relevant to portfolio management and the liquidation of
securities.
It is my view that there
are two major investment decisions relating to portfolio
management. The first is when to buy a security. This
decision is relatively easy since as managers we are
entrusted to stock up a portfolio with equities. Common
stocks, however, tend to trade within an acceptable price
range of value. At times they will under and overshoot their
intrinsic worth. Theoretically when they undershoot, due to
a panicky seller, we buy more stock. On the other hand when
they overshoot in price due to a highly motivated buyer, we
sell. It is the latter decision I would like to focus on.
The sell decision is
all-encompassing involving good judgment and an iron will.
Selling a stock which has done extremely well for an
investment manager is akin to "saying goodbye to an old
friend". In evaluating a common stock one must
distinguish between liking a company and liking its share
price. There is, after all, a difference. For instance, a
company with excellent management can be continuously held
in high esteem. However, while the quality of management and
the resultant company performance may not change over time,
its common share price will tend to gyrate due to
innumerable market influences. But a stock price might get
seriously out of line in relation to its true value and this
is where the gauntlet is thrown to us as portfolio managers.
Ultimately, we must abide by our disciplines.
Recently, we were
confronted with this very situation and sold two
longstanding ABC Funds favourites, Canada Bread Company and
FPI Limited. They were not easy decisions considering that
we held these two stocks for a long period and had done
exceedingly well. Nonetheless, a tough decision had to be
made. In a nutshell we had to deal with a natural human
tendency of complacency, review the investment merits of
these two companies in relation to their price and make a
serious financial decision. In the end we concluded that it
was in the best interests of ABC Funds to liquidate both
holdings and say goodbye to two old friends.
