It isn’t easy

Every month I write a tiny, unheralded ‘nib’ for Money Observer hidden at the back of the magazine among pages of data. It comments on one of the companies in the associated table of stockmarket winners and losers and I hate it when companies I’ve ejected from the Thrifty 30 subsequently appear in the list of winners.

This month Solid State and Anite are winners and I’m pondering whether I’m ‘selling’ too early.

Here’s a table of the companies ejected since I started the Thrifty 30 two-and-a-half years ago, and the rough profit or loss (not including dividends, spread or cost).

It’s a totally arbitrary table, I ejected these companies at different times and for different reasons. But purely on the basis of price, ejecting T Clarke and RM look like good decisions.

Ejecting Solid State and Anite look like bad decisions. I ejected them because I didn’t feel confident about the market valuation. I thought maybe the companies had achieved their potential and their success, while laudable and hoped for, had taken them into new products and markets, which is risky. But of course, that’s what the plan!

The question haunting me is whether I should have changed my view on the company’s valuation in the light of the remarkable turnarounds they’d staged. Particularly Solid State, which I recognised had changed its business and found a comfortable niche in rugged computers and batteries.

Knowing when to sell successful turnarounds is immensely tricky because the valuation is based on the fundamentals of a company that is distressed or performing poorly at least, but the company no longer is distressed. How do you know, though, that the much improved performance of the company will persist?

They say sell when the story changes, but that's exactly what you expect with a turnaround.