Does my ‘sell’ decision add value?

One of the things investors rarely do is to track the share price of positions that they have sold. Jason Zweig lays it out for us in the WSJ article “This is your brain on gains”.  If you reflect on this tendency you’ll see how odd it is. We obsess about the price at which we establish a position. We continually measure our performance against it. But after we’ve made the ‘sell’ decision we just kind of forget about the share price. It just seems to naturally drop off our radar, goes into the out-box. Maybe we feel that it’s better not to second guess ourselves so we just forget it. Yet most investors, I think, could profit from a thorough analysis of their sell decisions, perhaps even more than their ‘buy’ decisions.

As a value investor, the ‘buy’ decision is rather easy; you buy when there is a margin of safety between intrinsic value and market price. Even that ethereal theoretical guideline is not too difficult to translate into action. If you have an investment checklist (which you should, by the way) it will give you a good indication within a very short time whether a company meets your investment criteria. I’m not sure investors spend as much time on their ‘sell’ targets as on their ‘buy’ targets. I know I don’t. I do set a ‘sell’ target when I establish a position. I even try to update it quarterly or semi-annually. But I don’t spend that much time mulling it over. And I certainly don’t analyze my ‘sell’ decision ex post facto.

So, given Jason Zweig’s comments in the article cited, I thought I should take a look at my public ‘sell’ decisions. Let’s see whether I added any value or not. As a start, I looked at whether the prices of shares I have sold have increased or decreased since the sale date. As a next step, and more thorough approach, I compared this increase or decrease against the change in a benchmark, in this case the S&P 500 index. Of course, it would be even better if I actually followed the funds I disinvested to see what actually happened to them (for example, if I reinvested them in another position and what that position did) from the sale date to the present. But let’s stop at step 2 above for simplicity’s sake, otherwise we’ll be mixing buy and sell decisions.

Looking at the 7 sales from my portfolio page (see below), in all but 2 cases (WCG:Welcare Group and KSP:K-Sea Transportation) the share prices of the securities I sold have declined since my sale (pricing as of 10/31/2011). In the case of KSP, it was taken over by Kirby in June (announced in March) so I missed the takeover run-up. In the case of WCG, I thought I saw signs of potential management problems (a board member resigned over accounting issues) and thus sold the position too soon (Patience-a lesson still to be learned apparently). Now let’s see if relative to the S&P 500 I’ve done any worse. Even though the S&P 500 index is down since most of the sales, the results are similar; I’ve added value in 5 out of the 7 position sales, most noticeably with AVTR and HAWK which have both seen their share prices collapse since I sold.

Ticker	Sale Date	Average Sale Price	Current Price	Share price chg	S&P 500 change	over/(under) S&P 500
ASCMA	7/1/11	$50.54	$45.49	-10%	-6%	4%
AVTR	2/28/11	$21.70	$9.50	-56%	-6%	51%
BBEP	5/3/11	$22.50	$18.01	-20%	-8%	12%
KSP	2/28/11	$6.63	$8.15	23%	-6%	-28%
SCMR#	9/13/10	$29.64	$25.72	-13%	12%	25%
HAWK	5/24/11	$7.14	$1.28	-82%	-5%	77%
WCG	12/30/10	$29.25	$49.01	68%	-0.4%	-68%

# SCMR paid a $6.50/share dividend in Dec. 2010
note: current data as of 10/31/11

Happenstance or skill? The verdict is still out with so few observations, but I’m generally pleased with the results. They could, of course, be better. There is always room for improvement.

The analysis did, however, highlight another thing; I had two positions, HAWK and AVTR, that I really had no business holding in the first place;.The ‘margin of safety’ that I had imagined actually wasn’t there. Perhaps in the case of AVTR I simply bought too early; the jury is still out. Certainly in the case of HAWK I was dead wrong.

So far so good. This is an ongoing exercise I intend to replicate at regular intervals. I suggest the reader do the same. Investing is a journey of discovery; the day there is nothing left to learn is the day I move on.