When to Sell Stock like Warren Buffett

1.  When a higher return is expected by trading to another asset (to include the loss incurred by capital gains tax).

2.  When the company changes its fundamentals.



When to Sell Stock like Warren Buffett

Summary

In this lesson, we learned the importance of always understanding the consequences of our actions. Buying and selling stock can have an enormous impact on our success as an investor. The most important thing to learn from this lesson is the emotional decisions when selling stock can often lead to very poor results.

We learned that there are two major rules for knowing when to sell stock:

1. We sell stock when we can trade the capital into an investment that will produce a larger return after accounting for the capital gains tax paid (state and federal). In addition, you’ll want to ensure the risk assumed is comparable for the return received.

2. We sell stock when the business changes its fundamentals. This could mean the way they manage debt. The future outlook for earnings is decreasing…etc


http://www.buffettsbooks.com/security-analysis/when-to-sell-shares.html

The Reasons for Selling and for Buying a Stock

For every single trade, there is always a buyer and a seller.

The Reasons for Selling

Seller:  "This stock stinks.  I can make more money somewhere else."

Seller:  "I need money for my new car."

The Reasons for Buying

Buyer:  "This company is going to make me some money."

Buyer:  "This company is going to make me some money."

There are a few reasons for selling a stock, but there is usually only one reason for buying a stock.  :-)

The seller thinks the stock stinks, whereas the buyer thinks the company is great.
The seller thinks the stock is still good but he needs the money, and the buyer bought because he thinks the company is great.

Thousands of orders a day cause the market price of a company to move up and down.  However, the market price of a stock is determined only by a small number of players and not by all of the people.

You are not compelled to sell just because of short-term appreciation. Fisher taught either the investment you hold is a better investment than cash or it is not.

Sometimes the market will quickly confirm Buffett's judgement that a company is a good investment.  When that happens, he is not compelled to sell just because of short-term appreciation.  

He considers the Wall Street maxim "you never go broke taking a profit" to be foolish advice.

Fisher taught him that either the investment you hold is a better investment than cash or it is not.  

Buffett says that he is "quite content to hold any security indefinitely, so long as 

• the prospective return on equity capital (ROE) of the underlying business is satisfactory, 
• management is competent and honest, and 
• the market does not overvalue the business. 

If the stock market does significantly overvalue a business, he will sell.

In addition, Buffett will sell a fairly valued or undervalued security if he needs the proceeds to purchase something else - either

• a business that is even more undervalued or 
• one of equal value that he understands better.  

Beyond this investment strategy, however, Buffett confessed in 1987 that there are three common-stock positions that he will not sell, regardless of how seriously the stock market may overvalue their shares:  The Washing Post Company, GEICO Corporation, and Capital Cities/ABC.  In 1990, he added The Coca-Cola Company to this list of permanent common-stock holdings.

This 'till-death-do-us-part attitude places these four investments on the same commitment level as Berkshire's controlled businesses.  Permanent status is not something Buffett hands out indiscriminately.  And it should be noted that a company is not automatically "permanent" on the day Buffett buys it.  Berkshire Hathaway has owned shares of The Washington Post Company for 20 years and GEICO for 18 years.  Buffett first purchased Capital Cities in 1977.  Even Coca-Cola, first purchased in 1988, was not elevated to permanent status until 1990.

Wondering when you should exit the market? Use Lynch's rule of thumb.

Wondering when you should exit the market? Use Lynch's rule of thumb.

Should we all exit the market to avoid the correction?  Some people did that when the Dow hit 3000, 4000, 5000, and 6000. 

• A confirmed stock picker sticks with stocks until he or she can't find a single issue worth buying. 
• The only time I took a big position in bonds was in 1982, when inflation was running at double digits and long-term U.S. Treasurys were yielding 13 to 14 percent. I didn't buy bonds for defensive purposes. 
• I bought them because 13 to 14 percent was a better return than the 10 to 11 percent stocks have returned historically. 

I have since followed this rule: 
When yields on long-term government bonds exceed the dividend yield on the S&P 500 by 6 percent or more, sell stocks and buy bonds. 


As I write this, the yield on the S&P is about 2 percent and long-term government bonds pay 6.8 percent, so we're only 1.2 percent away from the danger zone. Stay tuned.

So, what advice would I give to someone with $1 million to invest? The same I'd give to any investor: Find your edge and put it to work by adhering to the following rules:

With every stock you own, keep track of its story in a logbook. Note any new developments and pay close attention to earnings. Is this a growth play, a cyclical play, or a value play?Stocks do well for a reason and do poorly for a reason. Make sure you know the reasons.
Stocks do well for a reason, and poorly for a reason.

1. *Pay attention to facts, not forecasts.
2. *Ask yourself: What will I make if I'm right, and what could I lose if I'm wrong? Look for a risk-reward ratio of three to one or better.
3. *Before you invest, check the balance sheet to see if the company is financially sound.
4. *Don't buy options, and don't invest on margin. With options, time works against you, and if you're on margin, a drop in the market can wipe you out.
5. *When several insiders are buying the company's stock at the same time, it's a positive.
6. *Average investors should be able to monitor five to ten companies at a time, but nobody is forcing you to own any of them. If you like seven, buy seven. If you like three, buy three. If you like zero, buy zero.
7. *Be patient. The stocks that have been most rewarding to me have made their greatest gains in the third or fourth year I owned them. A few took ten years.
8. *Enter early -- but not too early. I often think of investing in growth companies in terms of baseball. Try to join the game in the third inning, because a company has proved itself by then. If you buy before the lineup is announced, you're taking an unnecessary risk. There's plenty of time (10 to 15 years in some cases) between the third and the seventh innings, which is where the 10- to 50-baggers are made. If you buy in the late innings, you may be too late.
9. *Don't buy "cheap" stocks just because they're cheap. Buy them because the fundamentals are improving.
10. *Buy small companies after they've had a chance to prove they can make a profit.
11. *Long shots usually backfire or become "no shots."
12. *If you buy a stock for the dividend, make sure the company can comfortably afford to pay the dividend out of its earnings, even in an economic slump.
13. *Investigate ten companies and you're likely to find one with bright prospects that aren't reflected in the price. Investigate 50 and you're likely to find 5.

http://myinvestingnotes.blogspot.com/2012/01/whats-best-way-to-invest-1million-peter.html

Four Good Reasons to Sell a Stock (Morningstar)

When to Sell a Dividend Stock - Morningstar Video

Factors influencing Decisions: A Quest for the proper course of Decision-making in Share-investments

Factors influencing Decisions:

A Quest for the proper course of Decision-making in Share-investments

It has been seen for a long time that human being is not always rational and his decisions are not always objective. For instance, if one watches share market, technically the price of a stock should be reflection of its P/E, P/CF & P/BV values, but such is not the case most of times, because the prices of indices are also governed by various aspect and factors of human mindset- expectations, sentiments and excitement to name a few.

This unpredictability of human behavior has led to emergence of a new field in psychology termed as ‘Behavioral Finance’. Behavioral Finance is the study of roles of behavioral factors in the field of finance, especially investment

It is well-known fact that intelligence is one of the important factors, besides hard work and perseverance for achieving success in life. It is generally expected from an intelligent individual to perceive and understand situation properly, think rationally and reason out everything, before making any decision. Clarity of goal, a well-thought strategy to achieve the same, moderate level of motivation, a disciplined behavior with flexibility to reassess the strategies with new developments is certain other requirements to achieve success. This is applied everywhere, in all decisions and goals including individual’s investment decisions as well.

But since human beings do not live in isolation, therefore there are other factors as well which influence his interpersonal relations, and consequently his decisions. Rationality in a man’s decisions or behavior is not always seen as to be expected from them. For instance, people do make different decisions in the two similar situations or behave similarly in two different situations depending upon their emotive state of mind. Thus, emotion plays a vital role in influencing his behavior and decisions. This becomes more apparent in case of investment-related decisions when taken in relation to the share market.

But debate does not end just here. Human beings are not just born for investment; they have other things to do as well. There are numerous occasions when people make mistakes in investment-decisions mostly under the influence of emotions and stress. It is not possible for a person to be totally immune to his emotions, but once he is aware of the risks involved with emotional instability, one can limit the losses. In this context, fear and greed are the most well-known emotions. There is tendency in human-beings to make more money in short time and this tends him to invest in share-market, even when it is at boom. So when market is bearish, the emotion of fear replaces greed. Human-beings love profit, but hate loss even more. A slightly negative indication brings in a lot of negative emotions and consequently, fear comes in. Initially, investor holds position (while rationally, if he wants to quit, he should book losses at that time only) and once the market’s bottoming out tendency to quit gets bigger (though if investor has been rational, he should have waited for a little longer duration and should have stuck to his position). In this way, it would not be wrong to say that not only fear and greed have negative effect on rational thinking, but they also have adverse effects on the long-term strategies of individual. These two unfortunate passions bring in impulsiveness in the individual’s character and continue to press him to take irrational decisions.

Further, Defense-mechanism of denial used by a person to save his self esteem and his ego are also significant factors which prove dangerous in the long run. An investor is, most of the times, adamant to accept that he has made wrong decision. So, he sticks to his decision and end up holding his loosing position longer than what should have been. The anticipation of ‘being wrong’ by any investor, cuts his losses and enables him to take decisions which help him to recover the loss.

Another aspect of Defense-mechanism of denial is its effect on analytical reasoning. Under emotional state of denial, an individual perceives selectively. He tends to emphasize data and information which confirm his position and viewpoint. It also restricts the individual to rationally analyze any new adverse information. Sometimes, it also generates tendency to overemphasize any subtle good indicator and underemphasize the bad indicators, and so, compel the investor to continue with the loosing position, thus aggravating loses.

These factors always influence the decisions of an individual, but the degree of their influence differs. Now, it depends on the individual how he (or she) manipulates these factors for profit. A good investor is one who not only comes out of loss by applying logical thinking but also makes it profitable one. Moreover, one should not stick to his decisions, if situations have changed. The people with low self-esteem and low EQ stick with their decision and apply defense mechanism. False impression of hope leads them to further losses. They even set aside the direction of necessary indicators.

So, to be a good investor, the proper way to act is not simply to book profit at appropriate time, but also to minimize losses in the adverse situations.

’Never Say Die’

http://ansblog.com/2010/02/factors-influencing-decision-making-process/#ixzz0ehyAKUQA

Buy and Hold — Is It For You?

Let's take a look at what exactly "buy and hold" means. We'll also look at how long is long and when you should sell a stock.

What Does "Buy and Hold" Mean

It's an investment strategy that blends seamlessly with Fundamental Analysis. After you buy a stock, you hold on to it for a while even if its price bounces wildly. You sell only when you have good reason to.

You can see see how this is radically different from a market timing strategy — buy low, sell high.

This brings us to a very important question — how long is long?

Long is relative. From a buy and hold perspective, long would mean at least several weeks. Anything shorter than that would generally fall under another stock investing strategy called day trading.

If you've bought the stock based on the fundamentals, then you should sell only if you have very good reason to. And that brings us to the next important point....

When Do You Sell A Stock?

The best investors are divided when it comes to this question. At one end of the spectrum you have the Warren Buffett camp that says, "Our favorite holding period is forever." At the other end, you had Peter Lynch who held on to most of the stocks in his portfolio for a month or two at the most. His entire list turned over at least once a year. And, he had around 1400 holdings!

It's important to note here that these are big players with billions of dollars in investments. Different rules apply there.

Your decision to sell a stock should be based on the strategy you're using. Since we use Fundamental Analysis, here are our reasons to sell stock:

• When the price of a stock crosses its intrinsic value — the stock is now getting overvalued and with that comes the risk of a sudden drop in price. Time to lock in your profit and exit.



• You realize you made a mistake in your analysis — it happens every once in a while. You find something you don't like about the company or its management. Had you known that before you invested, you would have never bought the stock. If the reasons you bought the stock are no longer valid, it's best to sell. Remove the emotion out of the decision, admit you made a mistake, and sell. You will be better off.



• The fundamentals have deteriorated — the strong past financial performance of the company have now started going south. Evaluate the situation. If it doesn't look like the company will come out of the decline anytime soon, it may be time to sell.



• A better opportunity comes along — you find another company to invest in with great financials and a very attractive price. One small problem .... you don't have enough cash to buy a meaningful amount of stock. Can you sell one or more of the stocks you own that will free up some cash?

The buy and hold strategy does not mean owning a stock indefinitely. Believe it or not, selling a stock is much harder than buying a stock. You tend to get emotionally attached to the stock. It's hard to sell when the price has fallen steeply — you're always hoping that somehow the price will come back up again and you won't loose your money. It's hard to sell when the price rises — you don't want to get in the way of a good thing.

So again, let your stock investing strategy dictate when you should sell. Try and not let emotion get in the way. Remember ... you want to own the stock as long as you don't have a good enough reason to sell it. But if you do have a reason, sell it. Get it over with. Move on.

http://www.independent-stock-investing.com/Buy-And-Hold.html

When and Why to sell. "Rules" for Selling a Stock

When and Why to sell
There is really no "time" to sell; however, there are certainly reasons to do so. Most investors, less successful than you will be, believe that you should watch for the price to rise "high enough" — whatever that means—and then sell it to take your profit. Successful fundamental investors know that "profit taking is often profit-losing."

"Rules" for Selling a Stock
The first rule for selling is . . . don‘t! . . . unless:
1) The company has had an adverse management change.
2) Profit margins are declining or the financial structure is deteriorating.
3) Direct or indirect competition stands to affect the company‘s long-term prosperity.
4) A company‘s success is too dependent upon a single product whose cycle is running out.
5) The company is in a cyclical industry and the cycle is about to start down.
6) You must, in order to maintain adequate diversification.
7) An issue of equal or greater quality offers more gain prospects on the upside and less risk on the downside.
8) The stock is way overpriced (at least 150% of the five-year Av-erage P/E) and the company‘s earnings are growing at 12% or less. Even then, you might consider holding-or selling only some of it.

Note that, of the eight reasons for selling listed above, only the eighth suggests that you might sell to take a profit-and then only if: a) the price is way above average; and b) the company is growing relatively slowly.

• The first five of the rules call for chucking losers.  (Defensive strategy)
• The sixth suggests "weeding and feeding" in order not to be grossly over weighted in any particular industry or market sector. 
• The seventh and eighth call for replacing a stock with a low potential only when you can find one as good or better with a greater possible return.   (Offensive strategy)

Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

If I can’t convince you that a market downturn is no reason to panic, maybe the world’s greatest investor can. In his 1997 letter to Berkshire Hathaway shareholders, Warren Buffett wrote:

A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
The next time the stock market takes a tumble, remember Buffett’s advice. And then go out and buy yourself some hamburgers!

Did Buffett indeed make a mistake by not selling Coke?

Lessons from Buffett’s Decision not to Sell Coke: “I talked when I should have walked”
Written by Greg Speicher on August 2, 2010

In his 2004 letter to the shareholders of Berkshire Hathaway, Warren Buffett admitted that he made a mistake by not selling certain stocks that were “priced ahead of themselves.” The episode contains some powerful lesson that we can use to improve our investment results. 

Let’s look at how the businesses of our “Big Four” – American Express, Coca-Cola, Gillette and Wells Fargo – have fared since we bought into these companies. As the table shows, we invested $3.83 billion in the four, by way of multiple transactions between May 1988 and October 2003. On a composite basis, our dollar-weighted purchase date is July 1992. By yearend 2004, therefore, we had held these “business interests,” on a weighted basis, about 12½ years.
 
In 2004, Berkshire’s share of the group’s earnings amounted to $1.2 billion. These earnings might legitimately be considered “normal.” True, they were swelled because Gillette and Wells Fargo omitted option costs in their presentation of earnings; but on the other hand they were reduced because Coke had a non-recurring write-off.
 
Our share of the earnings of these four companies has grown almost every year, and now amounts to about 31.3% of our cost. Their cash distributions to us have also grown consistently, totaling $434 million in 2004, or about 11.3% of cost. All in all, the Big Four have delivered us a satisfactory, though far from spectacular, business result.
 
That’s true as well of our experience in the market with the group. Since our original purchases, valuation gains have somewhat exceeded earnings growth because price/earnings ratios have increased. On a year-to-year basis, however, the business and market performances have often diverged, sometimes to an extraordinary degree. During The Great Bubble, market-value gains far outstripped the performance of the businesses. In the aftermath of the Bubble, the reverse was true.
 
Clearly, Berkshire’s results would have been far better if I had caught this swing of the pendulum. That may seem easy to do when one looks through an always-clean, rear-view mirror. Unfortunately, however, it’s the windshield through which investors must peer, and that glass is invariably fogged. Our huge positions add to the difficulty of our nimbly dancing in and out of holdings as valuations swing.
 
Nevertheless, I can properly be criticized for merely clucking about nose-bleed valuations during the Bubble rather than acting on my views. Though I said at the time that certain of the stocks we held were priced ahead of themselves, I underestimated just how severe the overvaluation was. I talked when I should have walked.
 
As the following charts show, of the big four, Coke and Procter & Gamble reached the most extreme levels of over-valuation. According to Value Line, Coke sold at an average P/E ratio of 47.5 during 1999, its peak being considerably higher.  Procter & Gamble sold at an average P/E of 30.8 during 1999.

(all graphs show quarterly prices and P/E ranges from 1/1/1996 to 7/30/2010)

American Express

Coca-Cola

Procter & Gamble

Wells Fargo

(click images to enlarge)

 
What lessons can be learned from this?
 
If you’ve read my investing blueprint you know that I am a strong proponent of patient business-like investing for the long-term. This is a proven way to create wealth. However, at a sufficiently high price, all assets – no matter what their level of quality – should be sold.
 
What is sufficiently high? When the price clearly exceeds all reasonable estimates of the Net Present Value of the business’s earnings after taking taxes into consideration. 

What can make this difficult is that the intrinsic value – the net present value of all future cash flows – of a truly great business may be strikingly high in relation to its current earnings. Consider that a 50-year bond with economics similar to those of Coke (ROE of 30% and a payout ratio of 66.67%) would have a net present value of 46x earnings, assuming a discount rate of 8%. (Here’s the data.)
https://spreadsheets.google.com/pub?key=0AqDABX1wIfxZdHJzb0tlZHh5Y1gwNUI3WXc0M0lLRXc&hl=en&output=html 
 
However, unlike a bond where the coupon is set and contractually obligated, a holder of equity has no future guarantee other than his judgment about the competitive advantages of the business.  At the peak of the bubble, Coke’s price appeared to more than fully reflect the next 50 years of earnings and then some.
 
Plus, the proceeds of the sale could have been redeployed in cheaper assets, thereby raising the intrinsic value of Berkshire Hathaway. The challenge is that, unless you have a specific immediate purchase in mind, you never know how long you will need to wait to re-invest the funds of a sale.
 
If you buy or hold an overvalued security it will materially impact your future performance. Many stocks purchased during the Internet Bubble have shown a large increase in earnings with no progress in the price of the stock.
 
Consider an example. In 1999, Microsoft earned $.70 a share, sold for an average P/E of 49.8 and traded between $34 and $60 per share. Ten years later during 2009, it earned $1.62 per share, more than doubling its earnings, but sold for an average P/E of 13.4 and traded no higher than 31.5. Lesson: don’t overpay – it’s costly!
 
Confirmation Bias
 
Beware of confirmation bias, which Wikipedia defines as, “a tendency for people to favor information that confirms their preconceptions or hypotheses whether or not it is true.” Buffett was long on record as saying that his favorite holding period was forever, going so far in his 1990 shareholder letter as to call Capital Cities/ABC, Coca-Cola, GEICO, and Washington Post his “permanent four”. The risk with confirmation bias is that you are liable to act irrationally even at the expense of your own interests.
 
How Much Cash Will You Get Back?
 
If you are a businesslike investor, you should actually expect that a business in which you invest will deliver more cash than you put in. This is how Buffett operates as is evident from the comments about how much of his cost for purchasing shares in the “Big Four” he had already received. This is a lesson in how to think in a businesslike fashion about investing.
 
“The glass is invariably fogged”
 
Investing – whether deciding on a new purchase or whether to hold an existing investment – is always a business of judgment fraught with many uncertainties: “the glass is invariably fogged.” Accept this and get on with it by putting a premium on hard work, exceptional research, and following a rational investing process with great discipline.
 
What are your thoughts? Did Buffett indeed make a mistake by not selling Coke?

Read below or add a comment...

1. M. Ofenheim

   August 3, 2010 at 4:19 pm

   I don’t believe he did make a mistake by selling Coke. I one thing I learned reading and listening to Buffett is that all currencies are a race to the bottom. A dollar will simply buy less in 20 years than it does today.

   I doubt Coke will outperform the S&P during the next 5-10 years, however a business like Coke is one of the few franchises in the world that possesses true pricing power. Coke will sell just as many cans, bottles and syrup, if not more and at a higher price due to natural inflation. As result the value of the business reflected in the total market cap should be preserved.

   Of course we need to add the following caveats:
   1. Is there Competant management?
   2. Are they enhancing the existing brands?
   3. Are they adding brands either thru internal development or fair valued purchases of outside businesses (i.e. Vitamin Water)?
   4. Are they increasing shareholder value (share buybacks, increasing dividends)?

   Reply
2. Drew Kennedy

   August 4, 2010 at 10:57 am

   Consider capital gains taxes before selling.

   Imagine you bought a company for $500, thinking its fair value is $1000. If the company is currently trading at $1500, you would say it is overvalued and might consider selling. If you sold, and the capital gains tax rate was 30%, then you would owe $450 in taxes and have $1050 after tax.

   By selling you gain the ability to invest the cash elsewhere. But if the business you are selling is Coca-Cola, Gillette, or American Express, it will be hard if not impossible to find a better business. Even if you know of similarly great businesses, there is no guarantee that they will be cheap.

   On the other hand, by selling you lose out on any dividends, and real business growth. You will also be losing purchasing power due to inflation (should you hold cash). Finally there is no guarantee the price will fall sufficiently to make the business a bargain once again.

   If the business is terribly overpriced, your taxes will be low, and you have better companies at cheaper prices to invest in, then the decision is that much easier.

   Reply
3. Drew Kennedy

   August 6, 2010 at 10:49 am

   My math was wrong.

   The tax of $450 was based on 1500-(1500*.30). I incorrectly included the total sales price and didn’t take into account the purchase cost.

   Reply

http://gregspeicher.com/?p=841

How to Learn From When Buffett Sells

Adopting Buffett's very-long term perspective can help individual investors focus on what is important, says Morningstar's Paul Larson.

http://www.morningstar.com/Cover/videoCenter.aspx?id=548155

Value investing – When to Sell or Hold?

A good discussion on when to sell in another blog.

------

12:30 pm
April 10, 2012

matthew

Member
posts 13
9
Yes, I did this on Aeropostale. Approximately a 32% gain I got on that bad boy.
Reasons I sold, it had trouble getting past $21-$22, and then Barclay's raised there price target to $25 so more investors bought and price went up a bit. I took this chance and sold it, and it has now went back down after today -5%. Keep in mind that I sold it early basically because my intrinsic value was around $23 and I figured i'd rather sell now than risk more just for a small additional gain.

If I had not sold it then I would have been stopped out as during the price consilidation period I put in a stop loss @ $21
10:55 am
April 10, 2012

Jae Jun

Admin
posts 1408
8
do any of you sell after a big fast run up even though it is below intrinsic value?
6:29 am
April 1, 2012

nell

Member
posts 88
7
Some reasons to sell..


1. intrinsic value < price -> no margin of safety
2. business quality goes south, management issues etc.
3. better opportunity


One good reason to buy more is when market tanks but intrinsic value of your specific company keeps growing..

Best wishes,
Nell
10:58 am
March 31, 2012

BugMan

New Member
posts 2
6
I'm fairly new to this, and I, too, see selling as the hardest part.

One thing i've thought of that makes it easier is compare your current holdings to what else is out there. If are holding onto a good company, and you figure it has the potential to go up 12% per year, but you see other companies out there that have the potential to go up 25% per year, then sell your current stock and buy the other ones. It's not that the old company isn't good — it is — it's just that there are better deals out there.
8:03 am
February 27, 2012

gstyle

Member
posts 4
5
I am fairly new to value investing so I find it good to know other have had similar thoughts to my own!
2:17 am
February 25, 2012

Jae Jun

Admin
posts 1408
4
selling is defnitely harder than buying.
One of my weak points as well. If I had a partner, I'd find someone who was better at selling than buying. It would be a great combination.

But to sell, you would have to re value a company regularly.
If there isn't much upside to intrinsic value, then I'm willing to sell at 10% below intrinsic value rather than hanging on.
Companies like GRVY, I am happy to hold even if I'm up 100%.
8:17 pm
February 22, 2012

jalleninvest
Coronado, CA

Member
posts 22
3
Post edited 8:20 pm – February 22, 2012 by jalleninvest
G.raham came up with the 50% or two years towards the end of his life, in that interview that is bandied around the internet some. I am not at all sure that he practiced that in the Graham Newman closed end fund he ran. In one case, he did not, and that was GEICO which they bought half of in 1947 or 1948. They ended up having to distribute the shares to the shareholders of the fund, and it increased 54,000 per cent or something like that. Many became multimillionaires, quite a feat back then.
Walter Schloss, who died the past weekend at age 95, talked about selling. According to him that was the hardest part of this business, trying to figure out when to sell. He didn't like paying short term income tax rates and tried to hold stocks for a number of years. He commented ruefully several times about buying at $30, selling at $50 and watching the stock go to $200, etc. He recommended a new company to Graham that had wonderful prospects. Graham turned it down, saying it wasn't their kind of deal. It was Xerox, of course, but Schloss said Graham would have sold it at a double anyway and missed out on the big increase.

If it was easy, everybody would do it!
9:23 am
February 21, 2012

Graeme
Austin, Texas

Member
posts 162
2
Yeah, this is always a fun question.

For me what I do is I break up my holdings into different categories. For example, I have holdings that I bought at a good (not great) but good price, but they pay me dividends, and if they keep acting as they have for years, they should be increasing my dividends every year. I get a bit of return on the stock price increase, but a great return over many years with the dividends reinvesting. So my sell thesis on these guys is pretty firm: as in, I wont easily do it.

But then I have holdings that I would consider a deep value: selling at a deep discount to book value, or below NCAV or in a really beat up industry. These are the shares that I have a target price for: as in, I will sell when they hit that specific price. There is not a whole lot that would change my mind and make me hold on to it longer. And sometimes that target price is 50% above my purchase, 100% or even more.

So you need to judge for yourself whether the business you bought shares in is now fairly priced at it's 50% gain or if it still has room to go.
4:33 am
February 21, 2012

gstyle

Member
posts 4
1
Hi,

I was pondering the concepts of selling a value stock or holding it for longer. I understand that Ben Graham had a strict rule of selling after a 50% increase or after two years, whichever came first.

A stock brought at value brings the 50% gain, but if this stock is in a strong company with good prospects for the future, should it still be sold? At this point, do you make a decision to strictly adhere to Ben Grahams teachings or evolve to be more like Buffett in buying a good company at discount and holding it for a long time?

If the company in question was a 'cigar butt' then selling after its gain seems more obvious than for a value stock in a good company.

Thoughts / comments
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http://www.oldschoolvalue.com/blog/forum/value-investing/value-investing-sell-or-hold/#p4033

The investor with a portfolio of sound stocks should expect their prices to fluctuate

The investor with a portfolio of sound stocks should expect their prices to fluctuate and should

• neither be concerned by sizable declines 
• nor become excited by sizable advances. 

He should always remember that market quotations are there for his convenience,

• either to be taken advantage of or 
• to be ignored. 

He should never 

• buy a stock because it has gone up or 
• sell one because it has gone down. 

He would not be far wrong if this motto read more simply: “Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.”

Selling: The Hardest Decision of All

Many investors are able to spot a bargain but have a harder time knowing when to sell.  

• One reason is the difficulty of knowing precisely what an investment is worth.  
• An investor buys with a range of value in mind at a price that provides a considerable margin of safety.  
• As the market price appreciates, however, that safety margin decreases; the potential return diminishes and the downside risk increases.  
• Not knowing the exact value of the investment, it is understandable that an investor cannot be as confident in the sell decision as he or she was in the purchase decision.

To deal with the difficulty of knowing when to sell, some investors create rules for selling based on 

• specific price-to-book value or price-to-earnings multiples.  
• Others have rules based on percentage gain thresholds; once they have made X percent, they sell.  
• Still others set sale price targets at the time of purchase, as if nothing that took place in the interim could influence the decision to sell.  

None of these rules makes good sense.  Indeed, there is only one valid rule for selling:  all investments are for sale at the right price.

Decisions to sell, like decisions to buy, must be based upon underlying business value.  Exactly when to sell or buy depends on the alternative opportunities that are available.

Should you hold for partial or complete value realization, for example?

• It would be foolish to hold out for an extra fraction of a point of gain in a stock selling just below underlying value when the market offers many bargains.  
• By contrast, you would not want to sell a stock at a gain (and pay taxes on it) if it were still significantly undervalued and if there were no better bargains available.

Some investors place stop-loss orders to sell securities at specific prices, usually marginally below their cost.

• If prices rise, the orders are not executed. 
• If the prices decline a bit, presumably on the way to a steeper fall, the stop-loss orders are executed. 

Although this strategy may seem an effective way to limit downside risk, it is, in fact, crazy.  Instead of taking advantage of market dips to increase one's holdings, a user of this technique acts as if the market knows the merits of a particular investment better than he or she does.

Liquidity considerations are also important in the decision to sell.

• For many securities the depth of the market as well as the quoted price is an important consideration.  
• You cannot sell, after all, in the absence of a willing buyer, the likely presence of a buyer must therefore be a factor in the decision to sell.  
• As the president of a small firm specializing in trading illiquid over the counter stocks once told me:  "You have to feed the birdies when they are hungry."

If selling still seems difficult for investors who follow a value-investment philosophy, I offer the following rhetorical questions:  

• If you haven't bought based upon underlying value, how do you decide when to sell?  
• If you are speculating in securities trading above underlying value, when do you take a profit or cut losses?  
• Do you have any guide other than "how they are acting," which is really no guide at all?

A growth maverick shares his ideas.

Chuck Akre on the Search for Compounding Machines

A growth maverick shares his ideas.

Kinnel: You've said you look for "compounding machines." Would you explain what that means?

Akre: When I started in the investment business a good while ago, I was not trained for it in a traditional sense. I had been a pre-med major, and then I was an English major. So, I quite naturally had all kinds of questions about the investment business, and among them were the questions of what makes a good investor and what makes a good investment, and taking a look and studying different asset classes using data from what is now your subsidiary Ibbotson and other places. I came across the well-known piece of information that over the last roughly 90 years common stocks in the United States have had an annualized return that's in the neighborhood of 10%.

So, my question naturally was, well, what's important about 10%? What I concluded was that it had a correlation with what I believe was the real return on the owners' capital of all those businesses across all those years, all kinds of different balance sheets and business models--i.e., that the real return on owners' capital was a number that was probably in the low teens and therefore that kind of 10%-ish return correlated with that, and it caused me to posit that my return in an asset would approximate the ROE of a business given the absence of any distributions and given constant valuation. So, then, we say, well, if our goal is to have returns which are better than average, while assuming what we believe is the below-average level of risk, then the obvious way to get there is to have businesses that have returns on the owners' capital which are above that.

Early in the 1970s, I came across a book written by a Boston investment counselor, whose name was Thomas Phelps. And the book he wrote was called 100 to 1 in the Market. You probably know from the history books that Peter Lynch was around Boston in those days, and he was talking about things like "10-Baggers." But here was Thomas Phelps, who was talking about "100 to 1." He documented characteristics of these businesses that caused one to have an experience, where they could make 100 times their investment. The answer is, of course, it's an issue at the rate at which they compounded the shareholders' capital on a per unit of ownership basis and those that compounded the shareholders' equity at a higher rate had higher returns over long period of years. And so that's what comes into play is this issue of compounding compound machines, and we're often identified with this thing in our process that we call the three-legged stool. The legs of the stool have to do with the business models that are likely to compound the shareholders' capital at above-average rates, combined with leg two, people who run the business who are not only killers at running the business but also see to it that what happens at the company level also happens at the per share level--and then number three, where because of the nature of the business and the skill of the manager there is both history as well as an opportunity to reinvest all the excess capital they generate to reinvest that in places where they earn these above-average rates of return.

The most critical piece of that is the last leg, that reinvestment leg. Can you take all the extra capital you generate and reinvest it in ways that you can get continued earnings above-average rates of return? And that's at the core of what we're after in our investments.

Kinnel: On the sell-side, deterioration on those key fundamentals may lead you to sell, but do you also sell on valuation?

Akre: So, in response to your first observation, deterioration to any one of those three will certainly cause us to re-evaluate it. It won't automatically cause us to sell, but it will certainly cause us to re-evaluate it. Our notion is that if we don't get those three legs right where there develop differently in the future than they have in the past, theoretically our loss is the time value of money that it hasn't always been the case. But the deterioration of one of those legs or more than one of those legs diminishes the value of that compounding and, indeed, is likely to cause us to change our view. That's number one.

Number two, the issue of selling on valuation is way more difficult for us. And what we've said is that from a matter of life experience, if I have a stock that's at $40 and I think it's way too richly valued and I sell it with a goal of buying it back at $25, my life experience is it trades to $25.01 or trades through $25 and back up and it trades 200 shares there.   The next time I look at it, it's $300, and I've missed the opportunity. It's my way of saying that the really good ones are too hard to find.  

If I have one of these great compounders, I'm likely to continue to own it through thick and thin knowing that periodically, it's likely to be undervalued and periodically likely to be overvalued. The things that cause us to sell when one or more of the legs of the stool deteriorates. Occasionally, on a valuation basis, maybe we'll take some money off the table.

Lastly, if we're trying to continue to maintain a very focused portfolio, if we run across things that we think are simply better choices, then we may make changes based on that.


http://news.morningstar.com/articlenet/article.aspx?id=534635