r/valueinvesting
How do you distinguish between patience and dead money?
Author seeks a framework to decide whether to hold underperforming stocks or redeploy capital, using Adobe as an example.
- Hold positions if the original investment thesis remains intact and the business is fundamentally sound.
- Ignore cost basis and give management time to execute the business plan.
- Opportunity cost of capital is significant; waiting years for recovery might be inefficient.
- Anchoring to cost basis is a cognitive bias that can lead to holding dead money.
I know the 'S' word is taboo in this sub, but I have been re-evaluating my portfolio and I'm struggling with the decision-making framework around selling positions that are down significantly.
A few years into investing, I've accumulated a number of smaller positions. Some are down 20-30%, some much more. One example is Adobe, which is down materially from my cost basis. The company isn't bankrupt, still generates cash flow, and there is a reasonable argument that the business will continue to exist and grow. However, I'm increasingly questioning whether that alone is a sufficient reason to hold.
The debate in my head is:
Camp 1: Don't sell unless the original thesis is broken. Ignore the cost basis, focus on whether the business is still fundamentally sound, and give management time to execute.
Camp 2: Opportunity cost matters. Even if the thesis isn't broken, capital is limited. If I can identify businesses where I have materially higher conviction, it may make sense to redeploy rather than wait years for a recovery.
What makes this difficult is that some positions would need very large percentage gains to get back to my original investment. At the same time, I know anchoring to my cost basis is considered a mistake.
A few questions for more experienced investors:
- What are the primary drivers behind your sell decisions?
- How do you distinguish between a temporarily unpopular stock and a genuinely deteriorating business?
- How long are you willing to wait for a thesis to play out before deciding capital can be put to better use elsewhere?
- Do you have specific criteria that trigger a sale even when the company is still fundamentally healthy?
- How much weight do you place on portfolio simplification and reducing the number of positions you follow?
I'm less interested in opinions on Adobe specifically and more interested in the framework you use when deciding whether to hold, sell, or redeploy capital into higher-conviction ideas.
I would mostly stick to camp 1. You should know when you were wrong. For example i made the mistake of investing in cyclical businesses with almost unpredictable cash flows close to their peak before. When I realized my error I just sold at a loss.
Selling should come from new knowledge and not just from the stock being down in my opinion.
But it's not easy. Hence why most people fail to outperform the market (including me lol)
Both "patience" and "dead money" are labels you only assign after the fact, based on the price. You need a test that ignores the price.
The one that works for me: "Would I buy this today, at today's price, knowing what I know now?" Yes → the drawdown doesn't matter, it's patience. No → you're not being patient, you just don't want to realize the loss. That question never mentions your cost basis, which is the point.
For thesis vs deterioration: write the original thesis as falsifiable checkpoints, not vibes. Not "Adobe is a great business" but "DC net-new ARR stays above X." Then deterioration is a checkpoint failing, not a feeling. Checkpoints holding + price down = hold. Checkpoints breaking + you holding anyway = that's the cost basis talking.
Opportunity cost is real but it's the second question. "Higher conviction elsewhere" is a fine reason to trim. "It's down and I'm tired of waiting" is just the cost basis in disguise.
Thanks, this is helpful. Could you give some good examples of falsifiable checkpoints that have helped you in the decision making?
Sure. The key is they have to be specific enough that you'd know if they failed, and tied to the actual reason you bought, not generic health metrics. A few from my own holdings:
Memory/semis (I hold Micron): my thesis is the cycle plus HBM demand from AI, so my checkpoint isn't "revenue grows," it's "HBM stays sold out / capacity stays committed and pricing holds into the next quarter." If they start guiding to HBM oversupply or pricing rolls over while bit demand softens, that's the thesis breaking, not just a bad quarter. The cyclicality means I expect down quarters, so a price drop alone tells me nothing.
Foundry (I hold TSMC): the whole bull case is pricing power from a process lead, so my checkpoint is "leading-edge price increases stick and gross margin holds in the high-50s." If customers start pushing back on N3/N2 pricing or margins compress while leading-edge capacity is full, the moat (the lead that lets them charge more) is eroding even if revenue still grows. So I'm watching margin and pricing, not the top line.
The pattern: write the checkpoint against the specific bet, not the company in general. "Good business" can stay true while your reason for owning it quietly dies. And give it a number and a timeframe, otherwise you'll always find a way to argue the checkpoint hasn't failed yet.
Never said anything about Microsoft 😅
Also - what you are saying is accurate, but we typically call that Trading and not Investing.
Run the "fresh money" test: ignore your cost basis — if this were cash today, would you buy it at this price? No = you're just hoping to get back to even (the anchor you flagged), sell. Yes = not dead money, the red number's irrelevant. That one question already bakes in opportunity cost.
Just watch the trap: conviction in the new idea is usually inflated because it's currently going up.
Interesting conversation and intriguing- I wonder if there is some ideal mix of momentum and value investing that makes more sense.
But the answer is, as hard as it is to follow, that cost basis is irrelevant. As of today, do you have a better thesis than ADBE selling at 10% true fcf yield and 10% growth? I’d say it’d be hard to find another high quality company selling at such a low multiple. And their aggressive buybacks at such a low price are crazy. If the price stays this low you’ll end up owning the rights to a huge amount of cash flow.
You could make a case that ADBE is getting better - better guidance, lots of firefly cash ($300m?). Or you could say I don’t trust them because execs are fleeing and they’re being forced into a freemium model. For me they’re making good moves, growing well, adapting to AI and are really cheap for their stats.
What I’m skeptical on is it feels like the market is in this binary AI or SaaS mode. Anything good for AI buildout is bad for SaaS, so the money just moves over to semiconductors. While semiconductor cash is exploding, it’s still an extremely cyclical sector. At some point (and it may be a long time), that cycle will turn and the money will pour back to where there’s cash. At that point there will be a lot fewer adbe and pypl shares to go around.
"dead money" is optionality. As individuals, we are not forced to try and beat a benchmark. We do not have to be fully invested at all times. We set our own investment goals. We have our own timelines. We have our own risk tolerance.
When we have one really good idea, we can put a lot of money in it. When we don't have good ideas, we can buy an index or a money market fund.
Do not let other people's personal goals and priorities affect your own.
Camp 1 is for people that either have so many positions they can't juggle them on a daily basis (professional funds or people that doesn't want to trade etc.)
The returns on Camp 2 will vastly be better. Especially since in camp 2 you can easily switch to camp 1's stock if it runs.
Camp 2: Opportunity cost matters. Even if the thesis isn't broken, capital is limited. If I can identify businesses where I have materially higher conviction, it may make sense to redeploy rather than wait years for a recovery.
Bingo.
PYPL and ADBE value investors in from much higher prices are still waiting for the stock to triple to get back to break-even.
You can be right about "value" and wrong about timing. Or, you can be right about "value" and the market will never agree with you.
I use fundamentals to discover potential value investments, but wait for a stock to get into an uptrend before getting involved. While I'm waiting, my capital is working for me in rising stocks.
But uptrends are ephemeral and can turn quickly. I doubled down in sass during the may rally and instead of profit I just doubled my bags
Helpful :)
Well, yeah. If I was looking for S&P500 returns I'd definitely be full port VOO. I know I am supposed to be locked in and looking at the next 10 years, but doesn't opportunity cost come into play somewhere?
Consider tax harvesting as a factor. I have a position I am holding on for now to offset gains this year.
Thanks?