“Investing is positioning capital to benefit from future events. Yet I insist that we can’t know the future.” — Howard Marks
Everything with respect to an investment happens in the future. By its very nature, investing involves taking probabilistic bets on outcomes that have not yet occurred. Investing, therefore, is inherently probabilistic.
The word probabilistic is important. An investor is not someone who can predict the future, but someone who can take probabilistic positions based on the information, analysis, and judgment available at the time—while fully accepting uncertainty.
At a fundamental level, investing consists of only four actions: buying, sizing, holding, and selling. Much has been written about buying an investment. The question of when to sell, however, has always been a dilemma for many investors.
It is this dilemma that Decadal attempts to address through this memo.
First things first. We align with what Warren Buffett has often said: it is not in our natural inclination to sell. This bias is important, simply because meaningful wealth is created by holding great companies for long periods of time. As the saying goes, time in the market is more important than timing the market.
At first glance, the question of when to sell a position appears to have a simple, one-line answer. Investing represents partial ownership of a business, and therefore what happens within the business should naturally influence the decision to sell. While this is undoubtedly true, we believe that business characteristics alone do not fully capture the scope of a selling decision. There are other factors that must also be considered.
Amateur investors, swing traders, and other short-term market participants often emphasize price as the primary trigger for selling. In contrast, at Decadal, we believe that price should rarely be the dominant reason to exit an investment. This perspective may appear counterintuitive and will be discussed in detail later.
Broadly, we believe several considerations must come into play when evaluating a sale.
One such consideration is the state of capital, which we believe has a profound influence on decision-making. The opportunity set available to an investor varies significantly depending on the stage of capital accumulation. In the early years, capital is limited, making opportunity cost and risk aversion exceptionally important factors in selling decisions. As capital matures, however, finding new opportunities of appropriate size becomes increasingly difficult. At this stage, continued compounding through existing high-quality holdings may be more rational than constantly seeking better alternatives.
The availability of better opportunities can therefore justify a sale—but only when the alternative is meaningfully superior. Incrementally better ideas do not justify abandoning an existing holding. A new opportunity must be materially better in terms of reliability, probability of success, and long-term capital growth. This logic becomes even more compelling when the existing investment continues to compound effectively, as interrupting a working compounding process carries a real cost. If, however, the existing position is partially or fully mature, reallocating capital to a clearly superior opportunity may be rational.
Another critical factor is business fundamentals. What happens within the business must naturally influence what should be done with the holding. If the original thesis that justified the investment is fundamentally broken—or if it has been fully realized to its logical conclusion—then it may be appropriate to exit the position, independent of market price.
Finally, we believe sentiment represents the last frontier in selling decisions. Price, after all, is simply earnings per share multiplied by the price-to-earnings multiple. If earnings have already peaked, or are expected to peak relative to future potential, and the valuation multiple is being sustained primarily by euphoric sentiment, then the resulting price is not merely fully valued or overvalued, but egregiously priced. Such moments often represent one of the most favorable times to sell, as future returns from that point onward are likely to be muted.
In summary, Decadal’s selling discipline rests on three pillars:
(1) the availability of meaningfully better opportunities,
(2) a fundamental change or completion of the underlying business thesis, and
(3) sentiment-driven egregious pricing that compresses future returns.
Boredom is not a reason to sell. Price alone is never a reason to sell.
Outside of these conditions, inaction is often the most rational—and most difficult—decision.
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