Should Investors Sell a Stock When Management Makes a Decision They Disagree With?

What happens when you buy shares of a great business only to see the company move in an unfavorable direction because of poor management decisions? In this segment of Backstage Pass, recorded on Nov. 29, Fool contributors Jason Hall, Rachel Warren, and Toby Bordelon share their takes. 

Jason Hall: Got any other questions in here we want to grab? Hydrator's asking about TPI Composites here. Says might not be the time or place for this, but what do I do with my TPI Composites shares, I hate selling losers, just hardly ever do it. I'm on here talking about the company, so obviously, I'm not selling.

The industry, I think, still has great tailwinds. The company didn't go bankrupt, management did find a lender. For me, and I want to be clear about this, Hydrator, our job here is not to give anybody direct-investing, specific-tailored investing advice. We each have to make our own decisions about it. But I think it's generally a mistake to act quickly on these things.

This is just a mistake, a capital allocation mistake. It could've been very harmful to investors, but it wasn't. The stock price has cratered, but like it's not a permanent loss of capital because the business is still viable and still strong. I think you just have to focus on the fundamentals of the business and the industry and whether or not you want to continue to own that. I think it's really important to take your time to do that. One of the rules that I implemented a couple of years ago was add a day.

What does that mean? Before I buy or sell or make any decision, I add an extra day into my process. Just automatically, that immediately forces you to wash out a lot of the emotional aspects of it and to be a little more objective with making your decision. Also it gives you a chance to talk to some really smart people out there, get better input, and then act on it accordingly.

Rachel, Toby, I'd love to hear you guys weigh in on your thoughts. Maybe not on TPI Composites specifically, but just the idea: a company you love, something stupid happens, boneheaded management move. You're thinking is it time to sell? How do you go through that process? What do you do?

Rachel Warren: I'll jump in on this. It's not something, and I guess it would depend on what it is. We're speaking hypothetically here in my case, but I don't make buying or selling decisions on stocks based on a singular event with a company. For me, maybe it would be tempting in the moment to get a little nervous.

One thing I do is, I don't check my portfolio too often. I think that takes some of the day-to-day emotions out of it, and another thing is what Jason was saying, is sleeping on it, thinking about it before you make a decision. And something I also think about a lot, I know I've said this before, but it's worth repeating, is you might look at a decision management made and maybe the stock's trading down over a day or a series of days. But unless you sell that stock, you haven't really lost any money. You might potentially lose money, though, if you sell based on that news.

I think from my personal approach, and I'm not giving advice, but what I generally do is if it's a company I believe in the business, I believe in its long-term potential, then I keep holding it through those rocky moments, and I remember that maybe my stock is trading down over a series of days. This has happened a lot not because of management decisions, but this has happened a lot with a stock I love, Teladoc, where the market's been really hard on it and one day, "Oh, it's up 5%."

Then you maybe I get a notification, "Oh Teladoc's trading down 10% today." A lot of ups and downs with the company like that, but I believe in the business, I believe in its long-term potential. I think it is the indomitable leader of the telehealth industry and has immense runway left.

I know that unless I were to cash out on that day, I'm not losing any money, I'm just staying invested through those ups and downs. And over the long-term, I believe it will produce great returns. A long answer to my thoughts there.

Jason Hall: Rachel, I mostly love how you were able to turn that into a stock pitch for Teladoc. That was perfect.

Rachel Warren: [laughs] I try.

Jason Hall: Perfect. Toby.

Toby Bordelon: Yeah. I think just my thoughts generally on the topic: If you're going to be a long-term investor, I think that truly means long term. One thing we all need to remember is that in many cases, ideally, for every company you own, your investment will outlast current management. That's not because bad things happen, that's because people get older and retire and want to do different things. If you own a company for 40 years, management's going to come and go during that process.

If you see something happen because management has made a terrible mistake and you've lost faith, I like what you said, Jason, wait at least a day, but take a step back and ask yourself, do I think this management is going to be here in three years? Can I wait this out? Maybe it's a mistake they'll recover from, maybe they won't, but someone's going to come in and kick them out, like an activist investor. But sometimes waiting for new management can be all you need to turn the company around.

Now, you don't want to wait so long the company goes into bankruptcy. That's not the new management that you want, but oftentimes you'll get into a little bit of a lull here. Companies will start lagging and the solution is for management turnaround, a replacement of management. I think in [garbled] cases, you want to be owning a stock when that happens.

Jason Hall: You know, it's so funny, right, because in a lot of the services and in a lot of our personal investing philosophy, we really value founder-led companies. Because the person who was that visionary, that's still there. And they see that vision and they have a purpose to build that business. But then the flip side of it is, I think it's Peter Lynch who said it or maybe wrote it best, "Own businesses that some idiot could run because eventually, some idiot will run it."

That I think that oversimplifies things, but I think it's the point, Toby. The other part of it, too, is, so like two of my favorite companies, Trex, the decking company, and then Chart Industries, liquefied natural gas, cryogenic gas processing equipment manufacturer.

These are heavy industry manufacturing companies and cyclical industries that have just absolutely crushed the market over the five, 10 years. Between the two of them, they've had seven CEOs over that period. They both have really strong boards, great corporate culture and in all of those cases, there was only one CEO change that was unexpected.

Every single other change was planned and was expected to happen. Corporate culture is really important and having a board that really has its hand on the strategic goal, strategic direction of that company is really important, too. And just learn about them. Understand your companies. It makes it easier, too.