At Tabarruk, we look at investing in great businesses that we can hold as long as possible, while watching our money grow. We’ve talked about how time in the market is what allows compounding and the reason why we always beat short term trading and index funds.
Our intention with the shares we own in quality, ethical companies is to never sell.
Reason 1 – Personal circumstances or emergency
There have been times when personal circumstances have forced us to shave some positions, or sell the whole position in order to have money in the hand for emergencies.
If you read our article ($500 vs $5000), you would know we consider every investment the same way we would consider buying a house. However just like when buying a house, circumstances might arise that would make you consider changing you neighbourhood.
There are also situations that may arise in a company’s life cycle that will make us consider selling it’s shares.
Reason 2 – Company fundamentals have changed
What we mean by this is that, the direction or the journey the company was undertaking has changed. They are no longer able to keep up with competition and stay ahead of the market by being innovative. The moat they have built around their business is no longer able to keep competition out.
Every company changes over time, and the superstars are always changing for the better. The same way you have superstars, you also have companies that sometimes change for the worse.
In today’s economy, where venture capitalism is on steroids and stock markets experience volatility influenced by roid-rage, the number of companies which go bust has gone up exponentially.
Don’t believe us?
Have a look at the below sample from 2019. One can only imagine how many investors (seasoned and beginner alike were sucked in by the hype)
- The We Company
- Greenlane Holdings
These companies mentioned above, will never make money. How do I say this with the certainty? We ran it through our screening methodology.
The three companies above make up a total of approximately $55 billion USD. That’s from companies we don’t see ever turning the corner or be able to make a profit.
The reason we’re highlighting the above is because in the past companies used to last for longer than they do today. This is because the world we live in today is smaller, than the ones our parents grew up in. Companies need to be able to not only react to be successful but also adopt and set the trend in order to be relevant.
Here are some of the other things that could happen in a company’s fundamentals, in order for Tabarruk to put them back under the microscope:
- New management takes over, they start making mistakes, and the mistakes start costing the profitability.
- Company has a new player in the field of expertise. The company is unable to outpace the competition through their innovation and get wiped.
- Company no longer operates in an ethical way or in a halal sector
The changes mentioned above are only some of the examples and it is important you keep conducting a reality checks with all your holdings often. Ask yourself the following:
- “Is the company I invested in, still the same?”
- “Do I still believe in them, have they changed?”
- “Is the change for the better or worse?”
The above questions force you to make a decision, if the business you hold is now a better company or worse. If it’s the latter, you know what you will do. At Tabarruk we will do the same, we will part ways with the business.
Reason 3 – A better opportunity elsewhere
This is where you tread with caution. When you sell, the tax man get’s his share. That’s an instantaneous loss on your income, and as my Dad says, if you are selling because there is another opportunity available, write off 40% of your profit as a loss and think hard if this new opportunity can make that 40% or more in growth.
The opportunity has to have a more than solid chance, and there’s high conviction backed by research and analysis, the financials point to you being able to make the 40% back, to recover what you paid in tax to break even and then anything on top of that is a profit.
If you see an opportunity that can do this, knock yourself out.