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A Good Reason To Sell?

My fellow Fool David Kuo had previously shared two very good reasons to sell a share: when he needs the cash; and when his investment thesis in the company has changed. Those are great. But, he also got me thinking about another reason to sell a share.

You see, at the Motley Fool Singapore, we are staunch proponents of a long-term buy-and-hold investing philosophy where our investing time horizon in any single share is measured in years, not months or weeks (let’s not even consider days!). So, we take our buying decision seriously – as we’ll be stuck with that share for years! –  and perhaps, take our selling decision even more seriously.

After some thought, I feel there’s another reason to sell: When you have found a better opportunity.

In investing, we’re often weighing the relative benefits between different companies that vie for our attention among our limited dollars as there’re only that many shares we can buy. But, when we run out of investable funds and yet manage to find a share selling at a much greater bargain than what we have in our portfolio currently, I feel that selling shares to acquire the better-bargain can be a great move.

The Straits Times Index (SGX:^STI) closed at a peak of 3,876 on 11 Oct 2007 before bottoming out at 1,455 on 10 March 2009. Investors who bought into industrial testing and inspection firm Vicom Limited (SGX: V01) as well as conglomerate Jardine Cycle & Carriage Limited (SGX: C07) at the date of the STI’s peak would be sitting on pretty gains of 241.6% and 116.6% respectively as of 22nd September 2014.

Both shares have beaten the STI’s negative 15% return in the same time period by a wide margin, so an investor who had bought both shares on 11 Oct 2007 would likely be very satisfied indeed. As an example, an investor who invested $50,000 each in Vicom and Jardine C&C on 11 Oct 2007 would have seen his portfolio chalk up a fantastic return of 179.1% and grow to $279,100 from a cost of $100,000.

But, what happens now if the investor had made an opportunistic sale of all his Vicom shares at the STI’s trough to free up cash to purchase more of Jardine C&C as he felt at that time that the latter represented a much better bargain relative to the former? The tables below compare the difference in his portfolio due to the switch:

No Switch made 11 Oct 2007 10 March 2009 22 Sep 2014
Vicom Share Price $1.78 $1.53 $6.08
Jardine C&C Share Price $20.20 $8.86 $43.76
Portfolio Sum $100,000 $64,900 $279,100

Source: S&P Capital IQ

Switch made 11 Oct 2007 10 March 2009 22 Sep 2014
Vicom Share Price $1.78 $1.53 $6.08
Jardine C&C Share Price $20.20 $8.86 $43.76
Portfolio Sum $100,000 $64,900 $320,585

Source: S&P Capital IQ

Of course, we now have the power of hindsight – which is always perfect – in picking the ‘better bargain’, but it illustrates the benefits of selling a share for a better opportunity elsewhere.As we can see, an opportunistic switch from Vicom to Jardine C&C would have improved the investors’ portfolio considerably even though he had to sell the former at a loss at the STI’s bottom.

Some folks are in a better position than others because they constantly have new money with which to invest. For those who only have a fixed amount of cash to work with, they often have to make judgements about the relative attractiveness between a share they already own and one which they don’t. In such cases, I think that selling a share to purchase a better bargain elsewhere would be a great reason fro them to sell.

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This article was first published on fool.sg in September 2013.  The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.