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Should you sell when a stock becomes ‘expensive’?

‘If we’ve bought something … and it fits the strategy and the market runs with it, there’s no need for us to sell it’: Mia Kruger from Kruger International.

SIMON BROWN: I’m chatting now with Mia Kruger. She is a director at Kruger International. Mia, I appreciate your early morning time. It’s Budget Day, so I thought let’s ignore the budget for now. It will be coming later this afternoon. I want to come at you with a philosophical question, an investment question in a sense. 

When you do your homework, do your digging and you find a stock you like at a price you like, you enter it, you put it into a portfolio. What then happens if that valuation becomes stretched? Do you take the money and run? Do you sit back and sort of pat yourself on the back and let the dividends flow? What is the process at Kruger International?

MIA KRUGER: Good morning, Simon. That’s a very good question. I think if we just consider what we’ve seen over the past couple of years – if I can bring that in – then what all the research tells us is that normally winners follow momentum. So if a stock is up, it tends to feed itself and it tends to run further. That’s what we’ve been seeing since the GFC, the global financial crisis, about 12 years ago. 

The story is the same on the other side. When we look at the valuations and the value stocks, the momentum has been negative for them as well. So the long and the short answer is that normally winners tend to follow momentum further up, and losers tend to follow momentum further down. So it’s better to hold on to your winners and sell your losers faster. 

There are various behavioural traits when you consider why people want to hold on to losers, and why people think they should sell winners. But mostly it would be in your best interest to hold your winners when you look at the research.

Just to get to what we do, it’s exactly as you said. We follow a very stringent investment process. We focus on diversifying portfolios, whether it is our Equity Fund or whether it is our Balanced or Prudential, which is a low multi-asset equity-exposure fund. We follow the same sort of very stringent investment process where we build the portfolio up out of various asset classes on the balanced side or from the equity side – let’s focus there – from a very, very broad range of diversifying positions. And then from that position, if we bought something and put it in, and it fits the strategy and the market runs with it, there’s no need for us to sell it. 

So if we’ve got a good position and we bought it at the right price, and we see ourselves as long-term investors, then we don’t think it’s necessary to sell and try and find the market. Definitely not over the shorter term.

SIMON BROWN: I like your point. You talk around winners following momentum, and we are talking here about price. The other point, which is in that statement, is that winners tend to carry on winning. If you’ve got a stock that’s winning, be it whatever, it’s likely to continue doing it from a business perspective, as well. Its earnings are probably ahead of its peers. It is a winning company that knows how to win. It uses its status to continue to win. And therefore it’s a stock you still want in your portfolio. You might not be adding to it because of valuations, but a great company is proving its worth.

MIA KRUGER: Absolutely, Simon. And I think as investment professionals we don’t always distinguish very well between price movement and underlying earnings and value movement within a company when we talk to people who may be listening to your show, to the radio. And that’s very important. 

When you’re a long-term investor the price is what you pay, and what you look at over the long term is whether the company is becoming more valuable, whether the company is actually doing better than it did the day you bought it, whether it’s growing in its respective industry, and whether it’s adding to its earnings and to its profits. And if the reasons that you bought the company as a good investment keep on going right, then it still remains a good investment. 

Obviously, if something better comes along, a company with greater prospects and a company that has a greater future ahead of it, despite the fact that you might be in a good company it might be time to add to that a better prospect.

So it’s basically not very difficult. As we know, the whole thing about [making] investments is it’s very simple, but it’s not that easy to implement always because people’s emotions get in the way. 

So when you weigh up the prospect of returns of one company that’s higher than another, then you will obviously allocate to the higher-return company [more] than you did to the lower one. Those are the things you need to keep in mind when you’re an investor. 

When you’re a trader or a speculator, the story is completely different. I don’t think I’m well versed to speak in that area.

SIMON BROWN: We’ll leave that for the traders out there, but I love your comments. Will winners follow momentum? I think that’s 100% spot on. Mia Kruger, director at Kruger International, I appreciate your insights this early morning.

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