The Sellers Dilemma

By Marcimarc at de.wikipedia  from Wikimedia Commons

There has been a long debate on which is the most toughest decision for an investor - Buying or Selling?  It is always said that investing is simple but not easy.  Actually investing is easier said than done because it looks simple just like the sixers that Gayle hits during IPL but it is not easy like the way he hits it. In any investing there is a buy, and there is  a sell action.  In between these two actions we hold.  If there is contest on which is the most difficult decision, buy or sell, I would always vote for sell.  I do not know about majority of the people but from what I have observed or read from many well known investors, it has always been very clear that while many investors have very clear criteria on what to buy, not many people have very clear sell guidelines.  To support our buy guidelines, there are lot criteria set forth by many investors.
One of the top things that come to my mind is the Buffett quote which is given below

Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.

Okay, now if you see the guidelines on when to sell, these common guidelines are the ones that are used by many investors but hardly practiced by any

Sell the investment whenever

• When the investment matures based on its purpose or its need.  Some examples are if you have invested for your kids college education or marriage and you need to liquidate your investment or if your 30 year old bond matures
• When there is a better investment opportunity that would earn better than the return you currently get on your investment (opportunity cost)
• When the fundamentals of the investment have deteriorated and the investment is no longer good based on the initial expectation based on which you invested.  We are liable to make mistakes and we should acknowledge them and exit.
• The price of the investment has gone too ahead of the intrinsic value of the investment.

While these looks very simple on high level, if you look around you will find many instances where great investors around you have failed to sell their investments when one of the above mentioned conditions are met.  Even a great investor like Warren Buffet repented his decision not to sell Coca Cola when it was going at ridiculous prices in the 1998.  Please note that it is only recently that it started trading close to the level it trade in 1998 after a gap of 15 years.

Yours truly had many number of instances of not selling a investment at its peak.  If I take stocks, I have missed great opportunities to sell Deccan Chronicle, Ador Fontech, Bharti Airtel and many more stocks when they were ruling at ridiculous prices.   I find it very difficult for me to analyze even now why I did not sell those at that time. 

The biggest questions/biases an investor faces while taking a sell decision is the following in my opinion

• Familiarity Bias - Would the alternate investment  give equivalent or better return s that what we got from this investment?.  Known devil is better than unknown angel kind of thinking
• Endowment Bias - We always assign very high price to everything that we own.  Even when the price of what we own goes up substantially, it always remain cheap for us until it crashes in price
• Anchoring Bias - We saw the investment hitting a peak price but could not sell it, so we get anchored to that price and do not want to sell at even slight low price. 
• Loss Aversion - Once we sell a stock and then it goes further up, we feel very bad and at a loss.  We like to avoid this feel at any cost.  So, we think we can sell it when it reaches the highest level.  Issue is we do not know what is highest level..  If the stock we bought at higher price goes below our purchase price because of deteriorating fundamentals, we  want to avoid losses as well because a one dollar loss is more painful than the pleasure of one dollar gain.

So, as you see while it is rational for us to sell any investment at a particular price, we cannot execute it because of various biases that exist in us.  After all we are humans and we are prone to these  biases all the time.  We may thing we are rational but we are very much rationalizing than actually being rational as behavioural economics have found out. 

Best way to counter these biases that we have is to stick to some kind of formula based decision like selling based on some real quantitative measure rather than subjective decision making.  To be honest, even after keeping quantitative measures, I have failed many number of times to overcome the biases and execute unemotionally.  Probably that is the reason, they said its simple but not easy.  Have you had any experiences with regards to sell being tougher decision than buy?  Please share your comments.