One of the greatest dilemmas for investors is knowing when to hold 'em and when to fold 'em, with the sell decision being a more difficult proposition for value investors than most investors at times.
We buy a name because we believe it's cheap. We may have a price target in mind, but because it can take years for an idea to work, those prices can become moving targets and are not always that helpful. We can set stop losses, but that's a slippery slope with smaller names that have lower volume. In addition, we sometimes fall in love with our ideas, which is never good because emotion in investing is dangerous.
My years of mistakes -- and I'm sure there are more to come -- have taught me this: if you take a position in a name and your premise was wrong, or there's a material change that compromises your original reasons for taking that position, it's time to bail. It's easy to put your head in the sand and ignore material factors, especially given our behavioral-finance-influenced natures, but you've got to be honest with yourself. If there's a loss in a position, it's common to want to get back to even, or to average down. Both can be dangerous propositions if the story with a particular name has changed and you simply choose to ignore it. I'm not referring to a bad quarter; those will happen, and are not necessarily a reason to panic.
Earlier this week, I bailed on a name that I took a position in just over six months ago, which is a very short holding period for me. ModusLink (MLNK) , formerly CMGI, was messy at the time I bought the provider of supply chain and logistics services. However, it was a net/net (a company trading below net current asset value), traded at a discount to cash, and had significant operating loss carryforwards. This was truly a buying-ugly situation, and I was well-aware of that fact.
I planned to hold the name until there was some type of liquidity event, but a material issue changed my mind and I sold at a 5% loss. The latest proxy revealed that shareholders will be voting at next month's annual meeting on a reverse stock split that could end up being in the 1-for-5 or 1-for-10 range. That is rarely, if ever, good news.
Sure, it will help increase the stock price while decreasing shares outstanding and may stave off delisting, which typically occurs when shares fall below $1 for a period of time. However, the action screamed "sell me" to me. I can't remember many situations where a reverse stock split was not the beginning of the end.
This is certainly not what I planned when taking a position in MLNK, but it's an example of when to cut and run, at least in my view. We'll see.
While it may be healthier to stop following a name once you've closed a position, I will continue to follow ModusLink in the event that the sell decision was a mistake. That's how we learn as investors. The mistakes are just as important as the successes.