Buy, Sell, and Hold?

At a board meeting not too long ago, we were discussing whether to sell an asset of the Company. A discussion ensued about the merits of the deal and we got to the issue of price.

One board member made a comment that I generally agree with, he said "well if we wouldn't buy it for that price, we should sell it at that price". That's a piece of financial wisdom that was imparted to me many years ago and I have tried to use every time I am faced with a selling decision.

The act of selling is hard for me. I like what I own (or why else would I own it) and selling something you like is hard. But you must sell to make money. I always think of the classic Bernard Baruch line. When asked how he became so rich, Baruch replied "by selling too soon".

So the rigor of asking myself if I would buy something at that price is a good one.  If the risk/reward is too high to buy, then you ought to sell.

Back to the board meeting. Another board member whose opinions I respect disagreed immediately. He said, "there are a broad range of situations where hold is the appropriate course of action".

Hmm. That sounds right too. Particularly when the transaction costs are high and buying and selling are hard or expensive or impractical (like personal real estate).

So I'll agree with both board members. In general, I like to apply the "sell when you wouldn't buy" rule.  Hold is a bad decision unless you can clearly articulate why the costs of selling are larger than the risks of not selling.

Comments

[Max Niederhofer]

Hold is a bad decision unless you can clearly articulate why the costs of selling are larger than the risks of not selling.

I always look at it as the spread between two bundles of options. By selling now, you lose the option to sell at a later date but gain the option to buy back and/or to do something else now. By holding on to the asset, you keep the option of using the assets now and in the future and retain the option of selling it in the future.