This legendary investor who attracted attention from all sectors of the finance industry during cooperation with George Soros became famous for his top-down approach and understanding of macro factors. He emphasized a long-term investing approach, but he also has two crucial rules when selling stocks.
When a Thesis Change
Before you make an initial investment you back it up by an initial thesis. In it, you go through the reasons and convictions for which you are investing in the stock. It also contains information on goals that you set and expectations you have from a stock.
In time, the industry outlook, competitive landscape, or the company’s fundamentals may change. If it does, then it becomes conflicted with the principles you made before investing. If they changed in a bad way that could be a strong sign to sell.
Belief In The Company
An investor rarely invests if he doesn’t believe that the company will make gains, with shorting being an exception. Investors place their trust in the company, especially if they are in for the long run.
In case the management starts missing the opportunities, and stops delivering results, that can shake anyone up. If for any other reason, the prospects of the company dramatically change for the worse, then you are not dealing with the same company as at the beginning.
When Not To Sell
If the original thesis is still viable, current downturns should be ignored. Of course, if the case is extreme, you should re-evaluate the fundamentals and the thesis, see where the current situation is coming from, and adapt to it.
Summary
Stanley Druckenmiller is known as a manager who invests only if he is confident in his choice. During his hedge fund career, he rarely made mistakes, but he wasn’t reluctant to sell in case he identified a mistake.
His biggest turnoff from a company is when he loses belief in the company’s management, or when a thesis changes so much that it is no longer viable.
