Here is another million dollar question for stock investors – when do we sell a stock?
Well, lets again take some reference from one of the greatest investor in the world – Warren Buffett.
In 1988, he wrote this in his letters to his shareholders, “our favorite holding period is forever”
Erm…. Does that mean we should NEVER SELL?
Well, think about it this way, if we manage to find a great business that is profitable and making us good profit every year, and we managed to buy it at a great price, do we ever want to sell it? That may be the reason why Buffett literally buys over many businesses and holds them…. forever. Just take a look at the list of the businesses he bought over entirely.
Source from: http://www.berkshirehathaway.com/subs/sublinks.html
Do note that these are not businesses that he is trying to buy low and sell high because they are not in the stock market where there is a low and high every day.
Now, coming back to our topic – when to sell. Is it NEVER? Well, even Buffett sells his stocks. E.g would include Petrol China, American Express, Kraft Foods etc etc.
I would like to suggest some reasons to sell.
Well, lets go back to the reasons why we buy in the first place. We will only buy:
a. A good business
b. At a good price.
So simply put, we will sell when either of these reasons are no longer valid. i.e. It is either no longer a good profitable business or it is no longer at an undervalue price.
For the 1st reason, it will be very clear cut. Once the business is no longer good and we no longer have the confidence that it can produce consistent profits, it is a good reason to sell. We will keep our eyes on the best time to let it go and say good bye to it.
For the 2nd reason – no longer undervalue. This is trickier because the business may be still good and if we sell it too earlier, we may never be ale to buy it back again . But allow me to share a way . For me, i will set an alert SELL price. This is the price that meets the returns that I want.
E.g. if i buy ABC stock at $10 and I am aiming for 20%. So I will set $12 as an Alert Sell Price within that year and then subsequent years, I will add another 20% to it.
What this means is that I will be set on thinking when the stock price hits $12 within a year. Once it hits $12, I will start my consideration process and reassess the situation. The key question is if I believe the business is still worth holding based on the price. If it is overvalue in my opinion, i will sell it.
If I am unsure, i can choose to sell a portion and hold a portion.
A way to gauge this is to use PE ratio and compare it to growth rate. For e.g. if the PE ratio of ABC stock is 22 and I believe that ABC stock can only grow at 10% per year, the question is will i be willing to hold a stock that is selling 22 times its earnings when i believe that it can only grow at 10%?
Personally, this is overvalued. Some of you may be able to regconise that it is like the PEG valuation and you are right. If PEG is way above 1, I will let it go. But of course, this is a very simple way of doing it, and we know that there other considerations.
Well, thats what I would like to sell this session.
Do share with me your thoughts,
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Mind Kinesis Research Team