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BLOG: January is ‘Divorce Month’ – but when should you ditch an investment?

BLOG: January is ‘Divorce Month’ – but when should you ditch an investment?
Your Money
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Added pressures of the festive season can push some marriages and civil partnerships to fracture. Solicitors have spotted this trend too, noticing an uptick in enquiries about divorce on the first working Monday of a New Year – earning it the catchy moniker 'Divorce Day'.

Investors face less romantic – but often still emotional – soul searching when it comes to working out when to call it quits on a once much-loved, but now poorly performing or otherwise risky-looking holding. Spotting the genuine sell signs can be tricky.

For Alexandra Jackson, manager of the Rathbone UK Opportunities fund, the most common reason to dump a holding is a deterioration in fundamentals, such as worsening earnings growth or expectations, asking: “Have investors or analysts got ahead of what is actually deliverable, leaving room for a negative surprise?”

At the moment, the macroeconomic cycle is the biggest determinant of earnings for most companies, she says. Jackson sold the fund’s holding in equipment rental business Ashtead Group on just such a concern*, because it is “definitely not being reflected in the valuation, which is above its usual level”.

Ashtead is a very cyclical business model, largely relying on construction in the US. As a capital intensive business, it carries a fair chunk of debt. As economic activity indicators slow, Jackson wanted to “avoid indebted cyclical companies without a valuation cushion”.

Divorce fast and sell slow

Overly high share prices are also a sell signal for Neil Goddin, co-manager of the Artemis Positive Future fund, though, while with a divorce you probably want a separation concluded fast, he cautions to “sell slow”.

“Sell in chunks. Bank some gains. That way if the stock keeps going up a bit longer you don’t miss out. And if it suddenly topples, you do not risk losing all your gains. Selling gradually can make a difficult decision a bit easier,” he says.

And unlike with a divorce, Goddin always leaves the door open to buy back in. “If a good company falls in price we are more likely to buy it again than a divorcee is to re-marry their ex. It’s surprising how often the one you loved can be the one you love again,” he says.

The best-known stock Goddin has exited in recent years is Tesla, having bought it cheap in 2019 amid fears it was about to go bust. Today its share price is close to a record high, but other factors made it unattractive for Goddin’s impact fund.

“We buy companies not just to make a good return but also to make the world a better place,” he says, “Tesla did that in spades, but EV competition has now got tougher and this, coupled with Elon Musk’s behaviour, finally persuaded us to exit. Arguably the values he is demonstrating at X (formally Twitter) do not align with those of most Tesla customers. Time to part!”

Stubbornness, share prices and sell signals

When the story of a company changes, it can be another signal to sell. For example if it loses its competitive edge. “Better to change your mind than stubbornly resist admitting you got it wrong,” Goddin says.

While “buy and hold” stocks are investor gold dust, if the last couple of years has taught us anything it is not to assume a sudden upswing in business for a company will be sustained.

For example, in the third quarter of last year Goddin sold out of Nibe, the Swedish heat pump manufacturer, despite several years of strong performance. “Sky high power prices and German consumers unhappy about buying gas from Russia saw sales shoot up. But with energy prices falling, so have sales,” Goddin says.

Beware, however, of false sell signals. Just as the downfall of an otherwise healthy relationship can be triggered by malicious gossip, Thomas Patchett, Japanese equities investment specialist on the team behind the Baillie Gifford Japan Trust, says investors need to be selective in what they listen to.

“Given the abundant inflow of information we must contend with from one day to the next, it is paramount investors learn to filter; to separate fact from fiction, signal from noise, correlation from causation,” he says.

Patchett cautions against relying on share prices in isolation to trigger the sale of a holding. Instead, investors should pay close attention to the underlying opportunity, and how the fundamental factors might be evolving.

For each investment, the fund management team at Baillie Gifford formulates a forward-looking hypothesis, with milestones and assumptions they continually assess. Patchett says successful ordinary investors can do this too.

“By setting their own goalposts, laying out their expectations for each investment, investors will be better placed to objectively assess the developments of a company,” Patchett says. “Significant deviation from that path will often provide a clear signal to sell.”

Juliet Schooling Latter is research director at FundCalibre and Chelsea Financial Services