Merchants Investment Trust – When Reasons For Owning A Stock Change Time To Sell

My very first stock sale. It feels really weird considering I made my first stock purchase in 2015. I’m glad to say I have remained inactive over the past 2 years amidst all the investing volatility. But alas I had to act. Just because i am a buy and hold investor doesn’t mean i should sit on my hands when my investment thesis changes. I sold my shares in Merchants for a profit of just over 6%. As I have only held the stock for 4 months, the annualised return for my purchase is 18%. Not bad id I say so myself.

To put it simply, I sold Merchants Trust because the reasons for initially initiating a position changed. Looking at my post on the Merchants Trust purchase, the reasons for buying in to the trust was because of the high discount of the share price to net asset value (NAV) as compared to historical norms. Since then, the discount to NAV has reduced significantly and I am no more getting the underlying shares for cheap. At this point, with the share price of the trust close to the net asset value, the investment managers fee is no more worth it.

Another reason for selling is due to the increased correlation of the trusts holdings with my existing portfolio. Due to Merchant Trusts recent trading activities, the positions it holds are looking increasingly like those of another trust I hold; Dunedin Income and Growth Trust., Both trusts have 5 of the same Top 10 stocks. Furthermore, I have positions in my individual portfolio that are the same as those Merchants Trust holds. By this account, I am getting no diversification. Stock needs to fit well within a portfolio. It currently has to much correlation (similar holdings) to my existing portfolio.

A third reason is due to the trust having high gearing; it has employing leverage of 19.43%. By taking on debt, the trust can juice returns and pay down debt. But it also means that in a downturn, Merchants will be bit hit harder, all things equal. If I wanted to juice returns from the stock market, I would buy into market proxy stocks like Schroders, Hargreaves Lansdown, London Stock Exchange Group, Legal & General instead of using leverage.

I have also found a better use of my money. As this trust was bought in my Investment & Savings Account (ISA), I only have limited cash available in the account for the the current tax year. Although my cash holding as part of my total portfolio is close to 20%, most of the cash is outside my ISA portfolio and I can only add this cash to ISA once the new tax year kicks in on 6 April 2017.
As I have a feeling I will need the limited cash I have in my ISA between now and 5 April, I decided to fund my recent purchase of BT shares by selling my shares in Merchant. Whether this was the right move, only time will tell.

Is it the right decisions to sell one stock and buy another?

The one way I can get an indication as to whether my investment decision to swap one stock for another via feedback. This feedback can help me gain knowledge and experience as investor and help you make better decisions in the future, But this is harder done that said. Look at the feedback subsection by Morgan Housel below just to see how hard it is to learn from feedback in the world of investing. (Go check out the Collaborative Fund website where Morgan Housel writes, you won’t regret it.)

In 30 year, when I look back, i will size up what impact my swap of merchants for bt had on my life in light of my goals. the impact might be positive, it might be negative or it might make no difference.

At the current time, there is absolutely no way to tell. all i can do is make the best decision now, based on what I know now. Swapping BT for Merchants at present seems rational and logical at this moment in time. The key is to keep making intelligent decisions

Feedback When Investing by Morgan Housel

Studies on science of performance show that fields with true experts have a common denominator: Immediate feedback.

Shoot a basketball and within one second you get feedback on that shot. Tell a joke in a comedy club and the audience instantly lets you know if it’s good. In both fields people who practice quickly get better, because instant feedback tells you whether you’re doing something right or wrong. That isn’t true in mammography, farming, or education, where it can take months or years to see if your actions worked. This scales up: The longer the gap is between action and feedback, the harder it is to improve your skill.

This idea is so important in investing, where the gap between action and feedback can be several years, and in between you’re fed a steady stream of noise masquerading as feedback.

The only way investors can hope to do well over time is to exercise patience, since patience is one of the few things that can’t be arbitraged away by smarter investors and machines. But patience comes at the expense of feedback. Giving myself years to be right means it’ll take years to tell whether I’m right. Which is an astoundingly hard way to learn.

What do I make of a business whose revenue declined last quarter? It could be feedback that the company is in trouble. Or it could be run-of-the-mill volatility that every company faces from time to time. It’s hard to tell in real time. We usually need hindsight, and sometimes it takes years of hindsight before we can distinguish feedback from noise. Same with market moves. Higher or lower markets could be feedback about your decision. Or it could be the natural volatility of markets that are unrelated to your decision. Investing is like shooting basketballs, except it takes years to tell whether your ball made it in and in the meantime you see a bunch of false images of baskets made and missed, unaware which one is yours. You start to see why there are so few enduring Michael Jordans of the investment world.

The worst part is that by the time you can be sure you’ve been given legitimate feedback you may have forgotten why you originally made the investment, which distorts the process of feedback helping you make better future decisions. If you buy a company because you love its brand, and two years later it gets bought out at a higher price because another company wanted its patents, you are not receiving any feedback that you made a good decision. But the quirks of psychology will convince you that you did.

There’s no easy solution to this problem. It’s why investing is hard. But two things help.

Document your thoughts and decisions. The key to feedback improving performance is linking your actions to the outcomes that followed. Since so much time passes between investment actions and feedback, it’s crucial to document why you made a decision so your actions aren’t lost to the rewritten memories of time. Some investors journal their decisions. Some write investment summaries. Some send so much email between team members that everything is archived. What’s important is that you can objectively link outcomes to why you made a decision, rather than what you pretend to remember about why you made a decision.

Study the decisions and feedback of those who came before you. I may only get a few dozen or hundred pieces of feedback during my investing career, which is tiny. But I can study hundreds of other investors who have received the same, learning vicariously through their successes and mistakes. Investors have a fascination with market history, and they should. But more valuable than market history is the decisions investors made during that history – how they thought, how they acted, and what kind of feedback they got in return. Every kind of investing strategy has been attempted. No need to wait for feedback when others have already received it.

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