The Art of Selling
Sell discipline is the least written about part of investing — Every successful investor sells differently — The best investors decide the exit before the entry.
THE ART OF SELLING
Sell discipline is the most enigmatic of investment topics. Sell decisions typically get a chapter, if that, in even the best business books.
The reason for this asymmetry is that there are no concrete answers. Everyone can agree that buying a high quality business at a low price is a good idea. There is much to argue about, though, when asking when to sell.
Advice on selling runs the gamut. Fortunately, we can analyze how the best traders approach their sell decisions, particularly when the market is moving against them.
Sell What Shows a Loss
“You should have a clear target where to sell if the market moves against you. And you must obey your rules! Never sustain a loss of more than 10 percent of your capital.” — Jesse Livermore
Jesse Livermore made and lost several fortunes in the early twentieth century. His 1929 short of the U.S. stock market remains one of the great sell decisions in financial history, earning him roughly $100 million as the market collapsed.
First and foremost a trader, Livermore followed price action and was unmoved by fundamental investment metrics. With this approach, his sell discipline was mechanical.
His key principle was never to “sustain a loss of more than 10% of your capital.” For a trader on margin, a small loss could become catastrophic. This sell rule was a survival mechanism for Livermore.
Given that Livermore lost several fortunes during his life, following his trading rules is not recommended. When Livermore was successful, though, it was because his sell rules matched his style. Understanding his approach and the risks involved, particularly with leverage, allowed Livermore to achieve his success.
Sell When the Flywheel Reverses
“Markets can influence the events that they anticipate.” — George Soros
George Soros invested behind his theory of reflexivity: market prices influence fundamentals, which in turn influence prices, in a reflexive loop. With this philosophy, his sell discipline also rests on this feedback loop.
His 1992 short of the British pound was not a trade to hold indefinitely; it was a bet on a specific, self-reinforcing collapse. Once the UK exited the Exchange Rate Mechanism and the pound devalued, the thesis was complete, and Soros moved on.
Soros’s sell discipline is uniquely tied to narrative. Because the investment’s intrinsic value is being shaped by the market’s behavior, there is no target sell price. Similarly, because short-term moves may simply be noise within a larger reflexive cycle, Soros has the ability to hold investments even when they move against him.
Soros’s sell discipline is not only tailored for his investment approach, but ultimately defined by it. With his unique, but well-defined and disciplined approach, his bets are allowed to compound, resulting in enormous returns when his reflexivity principles play out.
Never Average Down
“Losers average losers.” — Paul Tudor Jones
Paul Tudor Jones famously refused to average down. His macro trading style required rapid reassessment: if a position moved against him, the market was providing information that his thesis might be wrong. Adding to a losing position, in Jones’s framework, was not conviction but denial.
Jones’s approach shares DNA with Livermore’s but adds a focus on position sizing. Rather than simply cutting losses, Jones emphasized never compounding them.
For traders without a long-term fundamental view, averaging down transforms a small mistake into a large one. Presumably, Jones’s buy decision implicitly assumed an investment would not be down substantially at any point.
For fundamental investors, Jones’s advice can be implemented before the buy decision. Would the investor be willing to buy more if a stock dropped by 30 or 50 percent, or would this break the thesis?
If the thesis would be broken due to such drastic price action, then averaging down is desperation and thesis creep, not a fundamental decision.
The Plan, Not the Reaction
Livermore, Soros, and Jones sell for different reasons. Livermore sells what shows a loss, Soros sells when the flywheel reverses, and Jones refuses to compound his losses.
The sell reasons differ, but the process is identical. Each investor decides in advance what would prompt a sale, based on their personal investment philosophy, and unbiasedly follows the rule when the moment arrives.
This process eliminates the need for judgment under fire. Instead, it requires only the discipline to honor a judgment already made.
