Is it time to sell Elders?

Elders (ASX: ELD) CEO Malcolm Jackman announced the company’s half-yearly results last week and Elders’ shareholders should take the time to review the results and consider whether it is in their best interests to remain invested in the stock.

Once a large and iconic company, Elders has been reduced to a fragment of its former self. For shareholders, that can cause a number of emotions which can affect their judgement.

Some Elders investors may be long-term holders, perhaps farmers whose family has done business with Elders for generations. These investors may remember the company’s glory days and still hold out hope of those days returning. Emotionally attached shareholders run the risk of ‘falling in love with the stock’, and this is dangerous as it can stop an investor from rationally weighing the pros and cons of a business.

Another potential emotional issue investors’ face is becoming fixated on a price. Investors can become so tied to the idea that they must at least breakeven on a poorly performing investment that they effectively fall in love with their purchase price. Elders shareholders need to act objectively, faced with the financial evidence they have before them today. Remaining wedded to a purchase price, or planning to hold out “just until I get my money back” is not a rational or sensible investment strategy.

The concept that investors need to remember here is you don’t have to make the money back the way you lost it. In investing there is no rule that what goes down must come back up. Investing requires investors to make trade-offs. In this case, investors need to determine if Elders stock will give them the return they are seeking or whether they would be better off using those funds to investing in more promising stock ideas.

A third important concept to be aware of is acknowledging your circle of competence. There is a chance Elders will continue in its current corporate form and there is a chance Ruralco (ASX: RHC) will be the white knight that rides in. However shareholders need to judge the likelihood of these scenarios. There is also the very real chance that capitalism will have its way and existing shareholders, along with Elders Hybrid (ASX: ELDHA) holders and a decent chunk of the debt holders too, could get wiped out altogether. The complexities of the situation and chance of survival at this point, even for insiders with knowledge of ongoing discussions with Elders’ bankers, should make investors question whether it is really within their circle of competence to fully understand the risks they are taking.

Foolish takeaway

Capitalism is built on survival of the fittest. While some companies survive and prosper, unfortunately many others don’t. The agricultural sector has had its share of struggles. PrimeAg Australia (ASX: PAG) has put itself up for sale after trading below its net tangible assets for too long. An important part of good investing is good portfolio management; investors should re-evaluate their portfolio from time to time and be open to changing their minds when the facts change.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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