The Art of Selling (Part II)

Sell discipline is the least written about part of investing — Even long-term investors must sell — Sell discipline must connect with buy discipline.

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THE ART OF SELLING (PART II)

In the last paper, we wrote about the sell discipline implemented by some of the world’s best traders. These traders have the discipline to reverse their judgment on a moment’s notice and take signals from the broader market to update their views.

Today we’ll analyze the sell discipline of long-term investors. Notably, even with a long-term philosophy, short-term decisions are occasionally required. Investors do not control the market and negative information or positive returns can arrive on a compressed timeline.

The key principle of sell discipline, though, remains the same for both traders and fundamental investors: create a sell process that reflects the investment philosophy and stick to it unemotionally, particularly in times of market stress. 

Sell When the Thesis Breaks

In January 2022, Bill Ackman bought 3.1 million shares of Netflix for $1.1 billion. Eighty-five days later, he sold the entire position at a $400 million loss.

Netflix had announced its first subscriber loss in a decade, paired with a pivot to ads and a password-sharing crackdown. Ackman's thesis rested on a predictable subscription engine. That engine had failed.

What looked like capitulation was capital preservation. Netflix kept falling after the exit, bottoming in mid-2022. Ackman redeployed this capital into businesses he had the confidence to hold.

When new information breaks the thesis, selling is not defeat, it is the process working as designed.

Sell When the Valuation Gap Closes

David Herro, longtime portfolio manager of Oakmark International, treats every investment the same way, seeking to capitalize on a gap between price and value.

Herro sells when the gap closes as the reason for owning the stock has been fulfilled. Capital should move to the next opportunity.

Holding a fully valued stock is, in Herro's view, complacency. A portfolio of fully valued names is a closet full of market exposure.

While a business that grows into its valuation may warrant a higher price target rather than a sale, the core principle still holds. Capital sitting at fair value is capital not compounding at a discount.

This discipline requires constant reassessment. The effort is integrated into Oakmark’s broader process, with ongoing portfolio reviews, intrinsic value updates, and disciplined trading.

Never Sell (...But Not Really)

“Our favorite holding period is forever.” — Warren Buffett

Warren Buffett’s approach is the most famous and the most misunderstood. Berkshire Hathaway’s wholly owned businesses are held permanently, creating the illusion that Buffett never sells.

But the extended hold period of Berkshire’s subsidiaries is uniquely enabled by Berkshire’s scale and structure. There is little point in monetizing legacy subsidiaries when the financial impact is immaterial.

 Buffett’s equity portfolio tells a different story. Despite the “forever” rhetoric, Buffett actively manages his public holdings.

Buffett’s ability to find cheap but growing businesses, capable of compounding capital for years into the future is a rare gift. Buffett’s exits are typically at fantastic gains, enabled by both his long-term hold period and the exponential benefit of earnings growth combined with multiple expansion.

But sales of Apple, PetroChina, and IBM demonstrate Buffett’s discipline in exiting positions after the market has recognized their value. Buffett’s investment periods are lengthy, but they are not forever.

Matching Buy & Sell Disciplines

There is no universal answer to when to sell a stock. Herro’s intrinsic value sales would cap Buffett’s compounding potential. Ackman’s thesis revisions incur trading costs and immediate losses that could be unnecessary with the hold periods of Herro and Buffett.

The art of selling is not selecting the right sell discipline in isolation. It is ensuring that the sell discipline matches the buy discipline.

Every great investor sells differently because every great investor buys differently. The sell process is not an afterthought. It is the other half of the investment philosophy.