You might not have heard of Dr Stuart Hutchison, Dr John Taske, and Lou Kasischke. I certainly hadn’t. But in some circles, I gather they’re famous — kind of.
What are they famous for? In short, not getting to the summit of Mount Everest, one day in 1996.
It was obviously a painful disappointment. They’d devoted several months to the acclimatisation and training exercises, and spent a not inconsiderable sum to join a professionally-guided expedition — tens of thousands of dollars.
And now, it was the day of the final climb to the summit.
Stop loss
The expedition leader had always stressed the importance of a ‘turnaround time’ — a stated time at which, if they hadn’t reached the summit, they should turn around, and head back to camp.
The expedition that Hutchison, Taske, and Kasischke were taking part in was one of three trying to climb to the summit that day, and the ascent was congested. In all, there were over 30 climbers all heading to the top, at various speeds.
Hutchison, Taske, and Kasischke had a turnaround time of 1pm. But at 11:30am, the climbers realised that they still wouldn’t be at the summit by 1pm, as they were still at least three hours away.
After some debate, they turned around — and survived.
Others weren’t so fortunate, including their own expedition leader. In all, four climbers didn’t make it back that day.
Quitting opens doors, as well as closing them
The tale is recounted in Annie Duke’s Quit: The Power of Knowing When to Walk Away, a book which contains quite a few interesting insights for investors. It’s also, it seems, in Jon Krakauer’s (apparently well-known) climbing book Into Thin Air.
And I gather there was a feature film, Everest, too.
But Quit took the story and applied it to everyday scenarios outside the world of adventure sports — including, as I’ve said, scenarios of interest to us as investors.
Quitting, argues Ms Duke (who apparently quit a university doctoral programme in order to turn professional poker player), isn’t necessarily failure — and certainly not in the long term. The opportunity cost of not quitting, she notes, is that you don’t get to do what you would have done had you quit.
And that something else could be insanely more successful.
‘Long term’ isn’t forever
Here at the Motley Fool, we like to think of ourselves as long-term investors, picking solid businesses with sound finances and decent ‘moats’: you know the kind of thing.
And mostly, an aspiration of ‘long term buy and hold’ works for many of us. I’m no trader — but I do think that I’ve a reasonable eye when it comes to spotting decent businesses.
So why would I ever sell, or ‘quit’, to use Ms Duke’s language.
Well, yes, I might have made a mistake in selecting a share. It happens. Warren Buffett did, he says, when he bought into Tesco. Because sometimes, the decent business that we think we see isn’t quite such a nugget after all.
But there are other perfectly valid reasons for selling, too.
It’s not your fault when the world changes
Sometimes, the business changes, and it might no longer be the same business that you bought into. Take Pearson (LSE: PSON), for instance. The business that I bought into was a publisher with some very attractive brands — a 50% holding in The Economist, for instance, 100% of the Financial Times, and 50% of Penguin Random House. It had some education businesses, too, but they didn’t especially excite me.
But, over the years, Pearson sold the bits I did like, and kept the bits I didn’t like, effectively turning itself into an education company — and, what’s more, one heavily focused on the American market. The results got worse, the share price suffered, and I sold.
Sometimes, the market changes: it’s not the same market that you bought into, perhaps for regulatory reasons, perhaps because of simple changes in taste. Tobacco is an obvious example. Casual dining, too. REITs focused on city centre office blocks and shopping centres, for another. In each case, it’s clear that today’s growth prospects, profits, and shareholder returns are but a shadow of their former glories.
Think about the upside
Many of us hold onto such shares for far too long. Things might get better, we argue. New management might turn things around. Stockmarket sentiment might shift. Consumer tastes might shift back.
And so on, and so on.
But of course, what really motivates us to hold on is something else altogether: loss aversion. We don’t want to lock in a loss by selling. At the moment, we think, we might be making a loss on paper, but once we sell, that’s it: the loss is crystallised.
Maybe so, but the opportunity cost of not selling the duds in your portfolio is that you can’t then buy something else with the proceeds. And one of the messages of Quit is that many of us never think about what we might buy instead, so fixated are we on our determination not to sell.
Which often, is probably a mistake.
