Rudi’s View: To Sell Or Not To Sell?

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Oct 04 2023

In this week's Weekly Insights:

-To Sell Or Not To Sell?
-Conviction Calls and Best Ideas
-FNArena Talks

By Rudi Filapek-Vandyck, Editor

To Sell Or Not To Sell?

When it comes to investing in the share market, very few events impact as much on the human psyche as a falling share price. In particular as it goes on and on and on.

As the old joke goes: investing in shares is really easy. You buy low and sell high. And if someone asks what do you do when the share price falls? You respond with: those shares should not be bought!

Life inside the share market is a lot different from the theory and the investment books, and there can be a whole suite in reasons as to why shares fall in price. Plus it can happen any time, including immediately after you bought in, and hit your favourite and biggest holding as well as that mistake you rather not think too much about.

Most investor responses can be identified through two opposites: one either does nothing and waits for the shares to recover back to the purchase price or we too sell our shares, don't look back and move on.

Others might have downside protection in place such as automated stop-loss triggers or an ironclad, no exceptions rule such as sell from the moment the stock falls by -15% more than the market.

By far the most dangerous response is to simply buy more shares, and keep buying, until the average purchase price is exceeded by the share price that must, surely, start rising again at some point? Averaging down under such conditions might turn into a guaranteed route to bankruptcy as many have found out throughout the times.

A dud investment does not become a guaranteed winner by throwing more money at it, and neither does time necessarily work to its benefit, while the market doesn't care at what price we decided to purchase. Then again, not every price fall means our purchase is a dud, or that we made a mistake, or it'll never come good.

Sometimes a falling share price should be welcomed: we can buy more at a lower price! We can finally get on board! But also: I knew it was a mistake and this is the motivation I needed to get rid of it.

As investors, irrespective of our age and time in the market, we move through phases of accumulating experiences during which all of the previously mentioned sins are committed and those dilemmas are encountered.

We know the advice from the legendary Peter Lynch: know your companies and why you own them, but it takes a proverbial mountain of character-building experiences to truly understand it, and then live by it.


Once we've managed to upgrade ourselves to the next level of becoming a better investor, there's always the next challenge through transitioning market dynamics, special circumstances, and rare exceptions. Share prices do not weaken on bad news only.

One such special circumstance is when our portfolio holding is suddenly under attack by shorters; market participants who position for and profit from a weakening share price.

Historically, some of the biggest fraud stories have been revealed by shorters who turned into investigative sleuths, including Enron in America, Wirecard in Germany, and sandalwood grower Quintis and asset manager BlueSky on the ASX.

But outside a rather small parcel of success stories, shorters have by no means covered themselves in lots of glory these past few years in Australia.

All of Amcor ((AMC)), Blackmores, Corporate Travel Management ((CTD)), Fortescue Metals ((FMG)), Nearmap, NextDC ((NXT)), Macquarie Group ((MQG)), Rural Funds Group ((RFF)), Seek ((SEK)), TechnologyOne ((TNE)), Vulcan Energy ((VUL)), and Wisetech Global ((WTC)) have found themselves under attack from shorters at some point in the years past.

In all cases the share price came under attack, in first instance, but the impact eventually only proved temporary. Vulcan Energy is the one exception, but we cannot blame the shorters; they publicly apologised and withdrew their negative thesis.

The likes of NextDC, TechnologyOne and Wisetech Global recently traded at all-time highs, which tells us all about the validity behind the attacks!

Once under attack, the share price might only have one direction of choice and that is down. Shorters often coordinate, and like wolves, they attack in pack. With the media as conduit, the news cycle often turns negative and there's a fairly decent chance more shareholders decide to join in the selling. Trends reverse, technicals look bad, people seek to limit losses, panic kicks in, et cetera.

As the share price drops, and the losses accumulate, often quickly, the early experience can be quite scary. What if the shorters are correct and fraud and obfuscation rule the accountancy books?

Some investors might decide to simply not take the risk. We're all into it for generating a decent return, not necessarily through fighting wars or turning into activist investors.

But if history is our guide, most short theses don't play out, apart from the immediate negative impact on the share price under attack. I, for example, have also decided on occasion it's better to avoid the agony and the headaches, but I am extremely pleased I remained a shareholder in NextDC and in TechnologyOne, and the FNArena/Vested Equities All-Weather Model Portfolio has returned as a shareholder in Wisetech Global.

Looking back at those experiences from the past, I do think the proverbial "secret" lays in that statement by Peter Lynch. The more you know about the company, the more confidence you can have in management and operations, and in the fact there's no-one cooking the books.

Shorters be damned!

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