When to sell? Sell when there is something else better to buy.

When should you sell?

Answer: Sell when there is something else better to buy.

Something else better for future returns.

Something else better for safety.

Something else better for timeliness or fit with today's go-forward worldview; a megatrend.



What is that something else? 

It can be:

- another stock
- an index fund
- a house
- or any kind of investment

It can also be cash. 

Sell that stock when .... when what? When cash is a better investment. Or when you need the money, which is another way of saying that cash is a better investment - at least it is safer for the time being.



Best possible deployment of your capital

If you think of a buy decision as a best possible deployment of capital because there is no better way to invest your money, you will also come out ahead.

It really is not hard, especially if you have done your homework.

And it is also made easier if you avoid rash overcommitments; that is, you avoid buying all at once in case you have made a mistake or in case better prices come later down the road.



Buy and hold quality companies for the long haul, and you will likely be handsomely rewarded for that patience.

Invest regularly.

Financial Efficiency - Is the stockholders' money (capital) working in forms most suitable to their interest.

Concept of Financial Efficiency

A company's management may run the business well and yet not give the outside stockholders the right results for them, because its efficiency is confined to operations and does not extend to the best use of the capital.

The objective of efficient operation is to produce at low cost and to find the most profitable articles to sell.

Efficient finance requires that the stockholders' money be working in forms most suitable to their interest.  

This is a question in which management, as such, has little interest.


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Actually, it almost always wants as much capital from the owners as it can possibly get, in order to minimize its own financial problems.

Thus the typical management will operate with more capital than is necessary, if the stockholders permit it - which they often do.

It is not to be expected that public owners of a large business will strive as hard to get the maximum use and profit from their capital as will a young and energetic entrepreneur.

We are not offering any counsels of perfection or suggesting that stockholders should make exacting demands upon their superintendents.

We do suggest, however, that failure of the existing capital to earn enough to support its full value in the marketplace is sufficient justification for a critical spirit on the part of the stockholders.

Their inquiry should then extend to the question of whether the amount of capital used is suited to the results and to the reasonable needs of the business.


$$$$$


For the controlling stockholders, the retention of excessive capital is not a detriment, especially since they have the power to draw it out when they wish.

As pointed out above, this is one of the major factors that give insiders important and unwarranted benefits over outsiders.

If the ordinary public stockholders hold a majority of the stock, they have the power - buy use of their votes - to enforce appropriate standards of capital efficiency in their own interest.

To bring this about they will need more knowledge and gumption than they now exhibit.

Where the insiders have sufficient stock to constitute effective voting control, the outside stockholders have no power even if they do have the urge to protect themselves.

To meet this fairly frequent situations there is need, we believe, for a further development of the existing body of law defining the trusteeship responsibilities of those in control of a business toward those owners who are without an effective voice in its affairs.


Benjamin Graham
The Intelligent Investor

How To Improve Your Value Investing Returns

Do you really have the courage of your own convictions?

If you're a value investor, how concentrated is your portfolio? And how concentrated do you think it should be?

This is a tough call. The more concentrated, the riskier, but the better your potential returns, of course.

It all depends how and where you're finding that value and how conspicuous it is. If you found during last year's slump, for example, that you lost a huge percentage of your wealth on paper, then you may be too concentrated. The receding tide took almost all boats with it. Then again, if you had the courage of your value convictions and had done all the research you possibly could, perhaps this was an averaging down opportunity?

As Warren Buffett has said: "Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market." And as his partner Charlie Munger says, proper allocation of capital is an investor's number one job.

Decide what is right for you

So it's important to get share allocation right in the first place -- and at a level that is right for you.

I've looked before at whether there's a correct number of stocks to own, which also spawned a useful debate; each to his own here. No-one else can really make this decision for you. But if you're too diversified, you're unlikely to beat the market.

Warren Buffett's value investing mentor, Ben Graham, wrote of a portfolio strategy with a mixture of shares and bonds with a maximum of 75% shares and 25% bonds when share prices are low and demonstrating good value -- and vice-versa (25% shares, 75% bonds) when share prices are high.

Often, investors not sufficiently diversified and overly confident in the good times suffer scary losses in the bad and are unable to take advantage of buying opportunities due to insufficient funds.

The problem is made worse by the inherent psychological tendency many investors are shown to have of being too quick to take small profits and to run with the herd. Whereas, with true value stocks (profitable companies with solid assets and cash, priced well below price to tangible book value) you certainly don't want to be a forced seller. Instead, the opposite is true; you want to be able to take advantage of generalised market sentiment taking the price illogically lower.

Of course, it may well be that there has been news that shifts a company's intrinsic value, which then needs to be reassessed. If the margin of safety is no longer sufficient, then it may have to be sold at a loss; not all value shares come good, and this is a vital consideration.

Improving your value returns

I was interested to read a paper on value investing by Schroder from last November (a PDF). It makes for fascinating reading and demonstrates what value investors already know to be true.

Here are a few brief insights:

• What you pay, not the growth you get, is the biggest driver of whether you make money.
• Focus on exploiting what we CAN know (valuation) and not what we CAN'T (the macro).
• Focus on areas that offer compelling value -- the greatest driver of long-term returns.
• Being different is usually uncomfortable but often profitable.
• Understanding balance sheet risk and income growth is as important as a high yield.

Interestingly, as an aside, the paper also looks at contrarian sectors offering best value from last September, with Homebuilders, Insurance and Banks seeming to offer the best opportunities.

Andrew Tobias advised (as paraphrased by Peter Lynch): "Don't put all your eggs in one basket. It may have a hole in it." Instead, Lynch urges private investors not to rely on a fixed number of stocks, but to investigate how good they are on a case-by-case basis. He goes on to advise us: "In small portfolios, I'd be comfortable owning between three and ten stocks." Of course, he was more interested in earnings growth than out and out value.

The bottom line for me is that a value portfolio should be concentrated into a few well-researched shares, but not at the cost of too much risk, as I like to sleep at night.

http://www.fool.co.uk/news/investing/2012/04/04/how-to-improve-your-value-investing-returns.aspx?source=ufwflwlnk0000001

The Time Value of Money

"A bird in hand (today) is worth two in the bush (tomorrow)."

Everyone would rather have a dollar in his or her pocket today than to receive a dollar far into the future.  Today's dollar is worth more - that it has more value - than a dollar received tomorrow.

The three main reasons for this difference in value are:

1.  Inflation.
Inflation does reduce purchasing power (value) over time.  With a 5% per year inflation, a dollar received a year from today will only buy 95c worth of goods.

2.  Risk
There is always the chance that the promise of a dollar in the future will not be met and you will be out of luck.  The risk could be low with a CD at an FDIC insured bank; or the risk could be high if it is your brother-in-law who is promising to repay a personal loan.

3.  Opportunity Cost.
If you loan your dollar to someone else, you have lost the opportunity to use it yourself.  That opportunity has a value to you today that makes today's dollar worth more than tomorrow's.

These three concepts - inflation, risk, and opportunity cost - are the drivers of present value (PV) and future value (FV) calculations used in capital budgeting and investing.

Present value (PV) calculations are used in business to compare cash flows (cash spent and received) at different times in the future.  Converting cash flows into present values puts these different investments and returns onto a common basis and makes capital budgeting analysis more meaningful and useful in decision-making.

Nominal dollars are just the actual amount spent in dollars taken out of your wallet.  Real dollars are adjusted for inflation.  When you take out inflation (i.e. convert from 'nominal dollars' into 'real dollars') the price difference becomes much more comparable and easy to explain.

Capital Budgeting

In capital budgeting, different projects require different investment and will have different returns over time.  In order to compare projects "apples to apples" and "oranges to oranges" on a financial basis, we will need to convert their cash flows into a common and comparable form.  That common form is present value.

Simply put, a little bit of cash that is invested today followed by lots of cash returned in the near future would be a REALLY GOOD financial investment.  

However, lots of cash invested today followed by a little bit of cash returned in a long time would be a REALLY  BAD investment.

Capital budgeting analysis is as simple as that.

Why do so many people invest themselves into bankruptcy?

Investment is simply the saving of money with the aim of making it grow.

The amount you invest is called your capital.  Investing is therefore the creation of more money through the use of capital.

The trick, of course, is finding the right assets in which to invest.

Why do so many people invest themselves into bankruptcy?

The answer is that they

• invest in dubious or risky products, or
• know too little about themselves and the product or asset classes in which they invest.

Value Investing: Always do due diligence

This cannot be repeated enough.

The value investor must do the numbers and work to understand the company's value.

Although there are information sources and services that do some of the number crunching, you are not relieved of the duty of looking at, interpreting, and understanding the results.

Diligent value investors review the facts and don't act until they're confident in their understanding of the company, its value, and the relation between value and price.

With great discipline, the value investor does the work, applies sound judgement, and patiently waits for the right price. That is what separates the masters like Buffett from the rest.

Investing is no more than the allocation of capital for use by an enterprise with the idea of achieving a suitable return. He who allocates capital best wins!