When to Sell a Stock (Hint: Ignore the 'Noise')

(This originally ran at Empire Financial Research.)

Since I started writing about stocks – and that has been decades – the most perplexing question I've faced, and the hardest to answer, is when to sell...

Buying is the easy part...

But selling?

There are so many variables rolled into one – from risk tolerances to objectives to instincts and knowledge... And let's not forget the human factor. The one absolute is that there's no one-size-fits-all answer.

And that's assuming you can answer perhaps the most important question of all: Are you an investor...?or a trader?

If it's the latter, it's no doubt easier. For them, my colleague Enrique Abeyta has two simple rules, which he constantly repeats...

1. Plan the trade and trade the plan.
2. Either trade a lot or don't trade at all.

For everybody else, it's truly a challenge, and it's where the?art?of investing comes into play...

That's true for even the pros. As Chris Cerrone, a partner at Akre Capital Management puts it...

Of our most costly mistakes over the years, almost all have been sell decisions.

In?a fascinating essay ?headlined "The Art of (Not) Selling," Cerrone says that "the mistake, in virtually every instance, has been?selling too soon."

At which point, even if you've made money, it's easy to talk yourself into a loss... the loss of what you?could?have made, if you had stayed with it.

That's always easier to see after the fact.

All of this is common sense, of course, until it's?you?who has to make the decision...

What makes Cerrone's essay so compelling is that he isn't just another guy who penned just another essay. He works alongside investing legend Chuck Akre, who no doubt has learned a thing or two over his many decades in the business.

Akre Capital's portfolio is relatively narrow, with just two dozen names... all bought because of their underlying fundamentals, with the goal of holding them for the long term – long enough, Cerrone says, "so that our capital may compound as the business grows."

And while there are certainly times to sell, such when there has been a fundamental shift in the business, he adds...

This determination to hold on is a critically important, and not always well understood, aspect of our investment philosophy. At its core, it relates to the power of compounding. We believe these two ideas –?(not)?selling and compounding – are inextricably linked. Getting the first wrong makes the second impossible.

That means?truly?knowing why you own a stock, enough that you can avoid the temptation to sell...

As Cerrone says, "We tune out politics and macroeconomics. To the surprise of many, neither valuation nor price targets play a role in our sell decisions."

That strikes to the part of the essay that probably resonates most with me, especially since I've been at Empire, writing long-biased reports with long-term horizons. Here's more from Cerrone (emphasis added)...

For the investor determined to hold on and compound, tuning out the noise is essential.

Quarterly earnings (are slide decks and conference calls really necessary every 90 days?), the financial press (cable news, in particular), and Wall Street analysts contribute to the cacophony.

It is important to keep in mind that the financial press and Wall Street live on eyeballs and transactions.?They are, by definition, trying to maximize the noise – to convince you to sell what you own and buy what you do not.

In his book?100 to 1 in the Stock Market, Thomas Phelps advised: "Never forget that people whose self-interest is diametrically opposed to your own are trying to persuade you to act every day."

He wrote that 47 years ago in 1972, and it is probably truer today than it was back then.?Wall Street trading desks do not earn commissions when you buy and compound,?and the cable news channels do not attract an audience by saying "there's nothing new to report today."

Here in our [Middleburg, Virginia] offices, our only television is in the conference room, and it gets the majority of its annual usage during NCAA March Madness. (Our CFO is an avid Tar Heels fan!) Cable news is not our ambient noise. We think it is bad for your economic health.

And as Cerrone goes on to say (emphasis added)...

In addition, we try to develop an understanding of what really matters for each of our portfolio companies.

We endeavor to look past the nonessential details. We want to identify the essence of each business's competitive advantage. It is a challenging process but the rewards are worthwhile. We can far more easily assess the relevance of new business developments once we are armed with our understanding of what really matters and what does not.

Quarterly earnings reports, for one thing, become much less of an event. So do short seller reports, newspaper headlines, and analyst downgrades.

In our experience, this kind of refined understanding is the best antidote to the noise and helps provide us with the fortitude to stay the course and allow our investments in growing, competitively advantaged businesses to compound uninterrupted.

Which is the point: Great investors care more broadly about the business, not every twist and turn of every quarter, or even SEC filings...

As a guy who used to use those as nuggets for my daily columns, I have the luxury of looking back and realizing that while at times they really?weretelltale signs of trouble, most often, they weren't.

The trick is knowing a company well enough to know which is which.

Of course, I know that's easier said than done... but with a focus on safe, stable companies that make real things or provide real services for real people – like what I'm looking for in my?Empire Real Wealth?newsletter – the task is far easier.

If you aren't already a subscriber, you can find out more about?Empire Real Wealth?– and how to gain access to the entire portfolio of open recommendations, including the latest one publishing later this evening – for only $49 for the first year of a subscription?right here .

Have a great weekend, everybody.