Good investors are also storytellers. An investment is a bet that we see potential others have missed (or undervalued). We buy when we have a theory of how and when the asset will reach its potential. Correctly laying out the story at the start gives us a picture of how things end, and a way to reality-check our thinking along the way.
Knowing when to sell is one of the great challenges of investing, and remaining clear-headed about the story is key. Before making an investment, I need to answer some big picture questions. What is the potential? What will it look like when the potential has been met? How will I know if I was wrong? Over time, real-world evidence validates or invalidates the story. Either way, certain endings are implied, each reflecting different conditions when it’s time to sell.
In an Alliance CGC real estate investment, we look for certain kinds of potential within our specialized niche. Often, we’re betting that we can unlock value by attracting the ideal tenant for a property and locking them in for a long term contract. A better tenant creates stability and lowers vacancy risk. The property’s market value rises, and we can close out our investment at a profit. We could keep collecting rent checks, but once the gains we forecasted are priced in, we might as well take our profits and move on.
Usually, an investment thesis takes years to play out, so it takes discipline to sell only under the right conditions. If conditions are good, we might receive many (profitable) offers on a property, and it’s easy to start thinking we were even more right than we realized. The key question becomes, has this investment reached the potential we saw? If not, we selling too soon will cause us to miss out on even greater gains.
Sometimes bad market conditions can cause an asset to under perform, tempting us to sell before things get worse. In this scenario, we have to ask do we still believe in the asset’s potential? If so, we can ride out a downturn, confident that the profit will come in due time.
In all cases, we must be clear eyed about the possibility that we were wrong from the start. The local market, community needs, or competitive landscape could be headed in an unexpected direction. As our understanding evolves, it helps to ask another question. Knowing what I know now, would I buy this asset today? If the answer is no, it might be time to sell.
We cannot know the future, but we can identify likely stories and let evolving facts show us which story is correct, and by implication when we should sell. This is just as true with stocks and bonds as it is in real estate.
No matter what, all our investments are judged by the bottom line. So before you make an investment, know what the likely outcomes are, how you can identify which story is correct, and where in the story you are. Our goals, needs, risk tolerances, expertise, strategies, and portfolios are all different, so there is no simple formula. The right time to sell depends on you.