My biggest business mistakes have been selling assets too early. The most successful capitalists know that the greatest rewards come from compounding gains over the long run. Indeed, one of the wisest pieces of investment advice is to “run your winners”. Yet there are always reasons to break this rule.
A brilliant recent article entitled The Psychology of Money, by Morgan Housel, explains the phenomenon succinctly. For most individuals, making investment plans stretching many years into the future is difficult, since life doesn’t proceed as one expects. People change jobs, homes, cities, get married, have children, inherit, become ill. Any of these big events can interrupt the magic of compounding your investments — because personal circumstances dictate that you need to sell a home, a portfolio, a business — and that can kill returns.
Another grave danger to compounding is boredom. I am certainly guilty of this weakness. I have sold great companies simply because I had owned them a long time. An example was Integrated Dental Holdings, a business I co-founded. After 10 years and an eventual big gain, it felt like a good time to exit: in fact, the business was poised to grow dramatically in value for at least five more years.
Cynicism is also a threat to compounding. I have seen many investments go wrong after five years or so, especially in fickle industries such as hospitality. When my then colleagues persuaded me to sell the restaurant operator Strada, I thought its tremendous early expansion would not be maintained. Yet for the next two years, it boomed, under the stewardship of my ex-colleagues, who remained heavily involved. Interestingly, Strada did fall out of fashion, but not until some years after my premature exit.
I have sometimes sold assets because they proved troublesome — but foolishly selling just as a turnaround was about to happen. One’s experience with a business profoundly influences your perspective of its future — even if conditions are becoming dramatically more favourable. Sometimes you are blinded to improved prospects by scars from the past. In such situations, knowing the history can be a disadvantage.
I have sold businesses too early when I decided I did not like the industry — even if it was clear that there was more money to be made. Years ago, I owned both bookmaking and cheque-cashing shops, but I realised that each essentially dealt in misery, and that there were more decent ways to make a living. Consequently, I was happy to dispose of them without regret.
Frequently I have sold too early because my partners wanted to sell. In some cases, they needed the money to buy a home, in other cases to pay off debt, or they were obliged to sell because they were ill. On almost every occasion, especially if my partners are actually running the company, I sell out when they do. Once this definitely worked in my favour: a partner and I backed an engineering concern. He fell out with the management, and from a sense of loyalty I resigned from the board and sold out together with him. We managed to secure a price very close to the all-time high — by sheer luck.
I think of myself as an optimist at heart, but most of us suffer from bouts of pessimism. Sometimes that has persuaded me to sell things I should have kept. I remember selling a London house far too cheaply more than 10 years ago, thinking the property bubble in the capital was bound to burst soon. That was a pretty dumb move.
Compared to many investors, my capital is patient money. Normally I want at least a three-year horizon for any investment, and the best ones I typically hold for two or three times as long. Selling always involves costs — commissions, fees, taxes and so forth. Finding attractive assets to buy is very hard, so when you alight on a solid performer with sound expectations over the long run — stick with it.
If your entire net worth is tied up in a business you’ve built, you should bear in mind the importance of diversification. A new book called Lost and Founder, by Rand Fishkin, describes how the author turned down an offer in 2011 of $25m for his company when it had achieved only $5.7m in annual revenue. The business has grown since then, but his stake could well be worth less now — and he still hasn’t had a payday.
Such sobering tales remind one that a profit remains a profit.