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Great Investor Sell Methodology


GrizzlyRock

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Board Aficionados,

 

I'm working on a personal project to enhance my sell methodology.  While I view my self as a reasonable seller of investments, I can always get better. A great way to get better is to learn from the experts. This thread is designed for people to add comments from expert investors - NOT our personal opinions. Thanks in advance

 

I'll kick it off with the following:

 

"Only sell to buy a security that is a third cheaper than the stock you currently own." - Benjamin Graham

 

“If investors could predict the future direction of the market, they would certainly not choose to be value investors all the time. Indeed, when securities prices are steadily increasing, a value approach is usually a handicap; out-of-favor securities tend to rise less than the public's favorites. When the market becomes fully valued on its way to being overvalued, value investors again fare poorly because they sell too soon.” -Seth Klarman from “Margin of Safely” Page 12

 

Cheers, Kyle

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I was hoping to find some better quotes, but here's the ones I dug up from my quick search for Phillip Fisher:

 

An investor should never sell out of an outstanding situation because of the possibility that an ordinary bear market may be about to occur. If the company is really a right one, the next bull market should see the stock making a new peak well above those so far attained. How is the investor to know when to buy back?

 

It is my observation that those who sell such stocks to wait for a more suitable time to buy back these same shares seldom attain their objective. They usually wait for a decline to be bigger than it actually turns out to be.

 

 

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Sell or reduce a holding when

 

1. Holding approaches estimated fair value.

2. Market, sector or company specific risk increases.

3. Becomes overweighted in the portfolio.

4. Has a better, lower risk profile investment waiting.

5. Can lower overall portfolio risk by reallocating capital.

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We’re partial to putting out large amounts of money where we won’t have to make another decision. If you buy something because it’s undervalued, then you have to think about selling it when it approaches your calculation of it’s intrinsic value. That’s hard. But, if you can buy a few great companies, then you can sit on your ass. That’s a good thing.  - Charlie Munger

 

 

 

---------- This breaks the thread rule and this is my personal comment. please ignore if you don't want to read -----------

 

actually, when I started, I operated the same way. buy good companies and hold them even when they became way overvalued. so when the drop eventually came and I gave back lot of my profit. I knew what I wanted to buy, but I really did not have a sell strategy. Then I read Mohnish Pabrai's "Dhandho Investor" and wised up. So when some stock reaches IV, I sell some. If it becomes overvalued, I sell out. Now I'm happy with my results.. The good thing is that, since I'm a small investor, I sometimes find something else. Otherwise I just sit on cash.

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ER: What are you sell criteria?

MW: We never sell. Our whole technique works much better on the buy-side. Since we continue to attract new money there is very little pressure to sell. We sell in the open market when things become grossly overvalued. We are just not that good at selling when things are moderately over priced. We also sell when we make a mistake. Mostly we sell when our companies get taken over. Most of our sales are not to the market. I’ve been doing this for a long time and I’ve held securities for three years and sold them after they’ve doubled only to see them triple over the next six months. When you don’t know what you are doing, doing nothing is the best course of action.

- Martin Whitman

 

http://www.grahamanddoddsville.net/wordpress/Files/Gurus/Marty%20Whitman/Profiles%20in%20Investin%20-%20Whitman.pdf

 

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Didn't Buffett say the preferred time to sell is never?

If you play the Graham and Dodd cigar butt game, you need to constantly flip your assets.

 

Buffett moved past that... though it took him a long time.  He says Berkshire Hathaway is his biggest mistake (because he should have bought a See's Candies-type business instead).  By buying quality businesses and not selling them, it's more tax efficient right?  And owning private businesses is more tax efficient than owning stocks.

 

This is what I understood from reading Carol Loomis' book.

 

2- Another way of looking at never selling is this: Buffett will sell a business (private or public) if things are bad.  He tried to sell Genre's derivatives business because it was an atrocious business that lost a lot of money.  Buffett wants to own companies with durable competitive advantages that stay durable.  Sometimes this doesn't always happen (e.g. World Book Encyclopedia killed by the Internet, Fannie/Freddie was sold due to bad management, etc.).

He is hoping that the business doesn't deteriorate in a way that causes him to sell.

 

3- Yet another way of looking at it is this: Buffett wants people to sell him private businesses at bad prices.  In exchange, he will take care of their baby and hold onto it forever.

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There are some methodological problems taking this post(s) without delving further, but here goes:

 

There are meta cognitive issues to watch out for, i.e.  the biases inherent in owning stocks--loss aversion, endowment effect and disposition effect. (for a quick over view see The Little Book of Behavioral Investing by Montier, the chapter on selling!  Beyond that then:

 

Firstly you have (obviously) to distinguish what kind of investment you are making.  The implication is that this is a long equity type  investment, not an arbitrage type position.  (Buffett did arbitrage and the holding period was most certainly not forever!)

 

Secondly, delving into  long equity, as Christopher Brown says:  "Make a clear distinction when selling between 'compounders' and cigar butt stocks."  Once the cigar butts get to fair value, it's time to move on, because  the cigar butts are "just going to go down again."

 

The difficult thing is what to do with 25% down position,  Pzena say that this is when you "add value as a value investor".  He says sometimes you should buy more, sometimes you should hold on and sometimes you should sell out.  (THat's not terribly useful.)  For me, personally, if it is down and I am not will to commit more funds, it is time to get out.  In this I'm following  Ainslie of Maverick who says, "either the security deserves more capital at its current price point or it doesn't--in which case, let's sell it and put the money to work in a security that deserves that incremental capital."

 

 

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