What triggers an exit from your portfolio? Do you set sell targets?

What triggers an exit from your portfolio? Do you set sell targets?

Stephen Yacktman: Many people set a price target by saying, “Okay, I think it is worth $X.” Well, we don’t think that way. We look at

• what the forward rate of return is, 
• stack it up against other investments and 
• determine which one is the highest and 
• which one is the lowest and 
• what risk we are taking to get that rate of return. 

We account for things like

• leverage, 
• cyclicality of earnings, and 
• the quality of the business. 

An investment that is going to make it into the portfolio with the lowest rate of return would be a company like Coca-Cola that

• has high predictability and good management. 
• We can just go into autopilot. 
• It becomes our AAA bond.

A sale is triggered by two things.

* If the rate of return is not sufficient or

* if there is a better opportunity elsewhere with a larger margin of safety to get a similar or higher rate of return, we’ll sell it.

The overall market dropped and consumer product names held up and the media companies got killed.

* News Corp. went from the $20s to $5.
* That drop opened up a huge rate of return gap and encouraged us to sell some of our Pepsi and buy News Corp.
* We viewed that decision as going from a low teens rate of return to something that was going to make a 20% return.

There’s no price target ever set, it’s just a function of the environment.

* What ends up happening, unfortunately, in an environment where everything goes up, is fewer of these returns are satisfactory and we end up more heavily in cash.
* It’s not that we’re trying to time the market; it’s just there’s nothing to buy.