When do you sell and replace a stock?
(1) Stocks with long term serious quality issues. Sell Urgently.
Short term quality issues like slowing sales, pre-tax profit, or EPS growth rates or declining pre-tax profit margins should be investigated.
Stocks with long term serious quality issues should be sold outright and replaced.
Holding a stock with a serious quality problem will prevent you from being in a quality stock whose fundamentals and price are advancing thus costing you that stock's price appreciation.
(2) Stocks that become too overvalued.
When the stock becomes so overvalued that there is little five year price appreciation left you may wish to replace it with a stock of equal or greater value and greater potential return.
In essence this is similar to the reason you need to sell stocks with fundamental flaws in the previous quality sections.
There you missed price appreciation because the stock had failed to meet you expectations. You lost money because you were in a stock with little price appreciation when you could have been in another stock with good quality and price appreciation.
Here the price has gotten way ahead of the fundamentals and it will take time for the fundamentals to catch up. You could replace this stock, capture the excess profits, and invest in another stock of equal or greater value whose price is in line with or behind its fundamentals. You'd have lost money because you were in a stock whose price was too high and going nowhere when you could have locked in the excess profit and moved to another stock with price appreciation potential.
Portfolio Management - The 5 Basic Steps
Perhaps the best way to approach this would be to develop an outline for Portfolio Management. Anyone want to propose something?
Portfolio Design - Write out your philosopy, methods, & growth and diversification goals.
Planting - Researching, comparing, and purchasing stocks.
Weeding - Defense - Monitor the quality (growth + efficiency)
Feeding### - Adding to positions of stock with continued good quality whose anticipated return will add to the portfolio's desired rate of return.
Pruning - Offense - Monitor for grossly overvalued stocks that could be replaced with stock of equal or higher value and better return potential.
### Remember to continue feeding your portfolio