Awesome post. When to sell has always been a question of mine. In hindsight biggest mistakes was I sold some FANGM too early and held on to crap too long.
One of Ray Dalio's principles applies here: "The who is more important than the what". I think that is the disconnect. You are betting on what the people will do, and there will be nothing in the current business or assets that will reflect that. You just need to get that right. You can obviously still be down 90% on Amazon or down on Microsoft for a decade. There is a world of difference between the valuation of the assets being "a little silly" and it being insane. A lot of investors over the last decade have learned the same lessons you have. You can definetely overpay for the "who". I am guessing there will be a lot of that given the current valuation of many great businesses (i.e. SHOP etc). The principle is that the who is more important than the what. Not that the what doesn't matter.
Great read and thank you! What about trimming when a position has meaningfully exceeded your estimate of IV? The article talks about selling, which i'm inferring means to exit the position. Is it possible that you can reflect the valuation concerns and increased uncertainty through a smaller position size, whilst still having some exposure so you can still benefit in the event that the business surprises to the upside over time? There's a nice quote from Andrew Wellington (Lyrical Asset Mgmt): “There are fantastic risk/reward opportunities that you are willing to do at 3% of your portfolio that you might be unwilling to do at 10%."
Max - That's correct (or at least how I view it). The decision on where to trim / sell isn't black or white, it changes on the margin as stock prices / expected IRR's move. So, to your point, a great business "deserves" to be a ~10% position at one price, but only a ~5% position at another price. That said, I always try to ensure that I'm making these decisions from the perspective of a long-term investor; said differently, my views on what impact a 10% - 20% move in a stock will have on future returns is different than someone who's only looking out over the next 12-24 months. I hope that helps!
Awesome post. When to sell has always been a question of mine. In hindsight biggest mistakes was I sold some FANGM too early and held on to crap too long.
Tony - Sounds like we've made similar mistakes before! Thanks for the kind words, I'm glad you liked the post. Have a great day.
This was a great read, thanks Alex
Thanks Conor! Took about 15 drafts, but think I finally got it to a point where I was saying what I wanted to say :)
One of Ray Dalio's principles applies here: "The who is more important than the what". I think that is the disconnect. You are betting on what the people will do, and there will be nothing in the current business or assets that will reflect that. You just need to get that right. You can obviously still be down 90% on Amazon or down on Microsoft for a decade. There is a world of difference between the valuation of the assets being "a little silly" and it being insane. A lot of investors over the last decade have learned the same lessons you have. You can definetely overpay for the "who". I am guessing there will be a lot of that given the current valuation of many great businesses (i.e. SHOP etc). The principle is that the who is more important than the what. Not that the what doesn't matter.
Great comment, thanks KentSay
Alex, this is very timely and an excellent read !!
Thanks Balaji! I'm glad you enjoyed it :)
Great read and thank you! What about trimming when a position has meaningfully exceeded your estimate of IV? The article talks about selling, which i'm inferring means to exit the position. Is it possible that you can reflect the valuation concerns and increased uncertainty through a smaller position size, whilst still having some exposure so you can still benefit in the event that the business surprises to the upside over time? There's a nice quote from Andrew Wellington (Lyrical Asset Mgmt): “There are fantastic risk/reward opportunities that you are willing to do at 3% of your portfolio that you might be unwilling to do at 10%."
Max - That's correct (or at least how I view it). The decision on where to trim / sell isn't black or white, it changes on the margin as stock prices / expected IRR's move. So, to your point, a great business "deserves" to be a ~10% position at one price, but only a ~5% position at another price. That said, I always try to ensure that I'm making these decisions from the perspective of a long-term investor; said differently, my views on what impact a 10% - 20% move in a stock will have on future returns is different than someone who's only looking out over the next 12-24 months. I hope that helps!
Hugely helpful and thank you for the reply :)