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The Art of NOT Selling
Howard Lindzon
January 05, 2020
I am an early seller.
Steven Wright – the comedian – tells a joke about being born by cesarian…he knows this because he leaves parties via the upstairs window.
Maybe I was 3 months born early. I’m always leaving the comfort of a great stock the first chance I get!
Ellen and I have always bought our houses right but selling them has been a mistake. We should have kept them all and eventually AIRBNB would have made holding a profitable way to keep them.
My current biggest stock positions are Apple and Google and LULU but since they are at all-time highs as I speak, all my sales in the past have been clunkers. I should have bought some more stock each time I was thinking of selling. I should also be adding to my position each time I buy their products.
What am I taking about?
Yesterday I read ‘The Art of Not Selling‘ by Chris Cerrune of Akre Capital Management and learned a few things.
On the power of compounding I enjoyed this anecdote.
An illustrative riddle
You are given the choice between two sums of money: one million dollars or a penny that will double every day for 30 days. Which should you choose?
Here are a couple hints. The penny that doubles daily would be worth $1.28 after the first week. After the second week, it would be worth $163.84.
You will probably reason that the penny would be worth more than the one million dollars. (Why, otherwise, all the theatrics?) By just how much, though, might surprise you.
It turns out that after doubling 30 times, the penny would be worth $10,737,418.24!
This is a terrific exercise because it highlights the not-so-obvious power of compound returns (in this case, the penny compounds at 100% for 30 periods).
I say not-so-obvious because you would have been better off taking the one million dollars until the 27th day. But in those final four days, the value of the penny increases from less than $700,000 to more than $10.7 million. Patience and a long-term perspective are required to give the power of compounding an opportunity to do its magic.
Most do not naturally grasp the concept of compound interest. It has been called the eighth wonder of the world (first by Albert Einstein, supposedly) for good reason. Most of us have to learn to appreciate it. And even once learned, we have to remind ourselves periodically of its wonder.
From this riddle, we learn the importance of holding on so that we allow our investments to compound uninterrupted for long enough that the compounding effects we saw in days 27 to 30 have an opportunity to play out in our portfolios.
Of course, even Akre believes there are times to consider selling…
Even with the power of compounding firmly in mind, there may be times when we believe it is appropriate and necessary to sell. These include, but are not limited to, when a business (1) is no longer growing at an above-average rate, (2) has had its competitive advantage impaired, or (3) has had an adverse change in management.
I am 54 and continue to have an open mind abut investing. While I continue to make ‘see early’ mistakes with favorite stocks in my own portfolio I have done better with helping friends and my own children. My kids have never sold down their Apple, Nike and LULU and it has made a huge difference in their portfolios. I have sold Facebook for Rachel a few times and that has been a mistake. This time we may not sell it so fast.
We all develop our own styles. Compounding is no doubt the biggest factor in growing your portfolios, but none of it matters if you don’t get started.
There are so many great tools to get you started investing today.
Have a great Sunday.
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