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When to Sell?


Hershey
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This topic continues to bedevil me.  My style is buy and hold.  Nevertheless, sell decisions still need to be made.  Typical scenario would be a 35% gain in a stock like JNJ exclusive of dividends.  The value now is too high to buy more, and at PE of 21 it is close to fully valued.  But sell?  The literature is very sparse regarding the sell decision.  Thoughts?  Thanks, Hershey

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I think when to sell can be a pretty easy decision if you know the company.  I model the company out with a conservative tilt when I am trying to decide to buy.  When trying to decide to sell you should do the opposite.  How well can the company reasonably perform?  If that doesn't offer a good rate of return you sell.

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Guest hellsten

This topic continues to bedevil me.  My style is buy and hold.  Nevertheless, sell decisions still need to be made.  Typical scenario would be a 35% gain in a stock like JNJ exclusive of dividends.  The value now is too high to buy more, and at PE of 21 it is close to fully valued.  But sell?  The literature is very sparse regarding the sell decision.  Thoughts?  Thanks, Hershey

 

Selling is difficult, especially when it comes to high quality businesses like JNJ. Anyway, I recently sold JNJ because the stock was up as much as I would expect from a megacorporation. JNJ also looks fairly valued or a bit expensive to me. A good reason for selling, IMHO, is if you find something cheaper.

 

FFH still holds JNJ though:

http://www.dataroma.com/m/holdings.php?m=FFH

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This topic continues to bedevil me.  My style is buy and hold.  Nevertheless, sell decisions still need to be made.  Typical scenario would be a 35% gain in a stock like JNJ exclusive of dividends.  The value now is too high to buy more, and at PE of 21 it is close to fully valued.  But sell?  The literature is very sparse regarding the sell decision.  Thoughts?  Thanks, Hershey

 

Are there better opportunities to deploy the funds to? 

 

Has anything fundamental changed (other than price)?

 

If the answer to either of those is no, holding is probably the best course.  If both are no than holding is clearly the best choice. 

 

If you're just feeling defensive and want to lighten up, maybe consider a standing limit order to sell part at an acceptable price, or buy some puts.

 

 

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I find this a very good question and a very difficult thing to decide on. I have this problem with JNJ (bough @59.05) and NVS (bought @ 54.27 1 year ago). Both are very stable companies with nice moats but their valuation is now fair (I do not believe they are overvalued yet).

 

For now I decided to just hold until a 30% overvaluation occurred but I'm very curious for other people's opinions on this as my motivation for this decision isn't completely solid.

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I think holding companies as long as they are fairly valued is probably best, because owning a fairly valued company beats holding cash. I would only sell if you don't have cash and there is a better opportunity.

 

This is assuming that the specific company is not a huge part of your portfolio. If you bought something very cheap and it's up a lot and now also a huge position in your portfolio you probably should reduce your position.

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I think that the best answer on the topic came from Dengyu who sadly does not post that much anymore.

 

Basically, he looks at his holdings in his portfolio and compares them on a price to value basis. So, you would allocate more capital or percentage of your portfolio in the holdings that have the largest discount to value. Not only that, but he would also compare his holdings continuously to whatever is available in the stock market. So every holding is competing to be in your portfolio along with every other opportunity out there.

 

On the price to value equation, I think that you have to be careful about how you determine when this value target will be attained or the certainty of it. Predicting the future of a JNJ is a lot easier than some net-net. So an honest target along with a discounted price to value works best IMO. I use 10% rate for simplicity. You also don't want to tweak your portfolio all the time so the difference in price to value between holdings has to be substantial before making adjustments. You also need to be very certain in your assessment when you decide to sell a holding to buy a new one since you are quite likely to know much more about the one that you carried for months or years than this newcomer. Taxation is also something to consider, so you may want to adjust the price to value for that fact.

 

Regarding JNJ, Buffett has been getting out of it since the 3rd quarter of 2011 and has been buying IBM and WFC. There is only one reason why is doing that and that must be because he sees more upside in IBM and WFC. He also knows that he will be paying taxes on any JNJ gain too, so the reason to sell must be pretty strong since this company pays a reliable dividend and he could have simply used cash or a bond to buy IBM and WFC instead of selling JNJ.

 

Cardboard

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I like the way Tweedy Browne thinks about it starting on pg 37 of the attached document. 

 

"At Tweedy, Browne, we generally sell a stock when its price reaches our estimate of intrinsic value, or sooner if we have a better investment to replace the investment that we have decided to sell. In considering the possible sale of a stock, we calculate the effect of capital gains taxes that would be paid if the stock were sold, and consider the net valuation that would be received for the stock after the payment of capital gains taxes. This net-of-tax valuation for the stock that we are thinking of selling is compared to the valuation of the prospective new investment that may replace it."

 

Of course this methodology applies only to taxable accounts.

Investing_for_Higher_After_Tax_Returns.pdf

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Assuming liquidity: Look at the firms announcements & any industry pricing data over the last quarter. Estimate EV. If the result is a lower price expectation, sell 1/2 the holding & buy it back later. Long term, your objective should be a stable holding entirely funded with house money; but to get there you have to trade the odds, & trade patiently.

 

On any given day, every holding is competing against cash for a weighting in your portfolio, & the bias is to cash (minimum risk). If you're wrong it's just an opportunity loss, & you still have 1/2 your original position.

 

Assuming no liquidity: You either sell slowly well ahead, in expectation of a loss; or sell something else to raise cash for an additional purchase. The text book example is tax loss selling 60 days ahead, & repurchasing 30 days before the tax dead line. Tax loss, lower cost base, AND cash back.

 

Also keep in mind that PM's are fired if they aren't always fully invested; you don't have the same liability. If a PM sells company X in Industry A, he/she effectively has to replace the weighting with another company in the same industry - even if the near term prospects for that industry are total Sh1te. You don't have to  :)

 

SD

 

 

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Guest hellsten

Selling is difficult, even for Warren and Charlie:

The portfolio actions I took in 1998 actually decreased our gain for the year. In particular, my decision to sell McDonald’s was a very big mistake. Overall, you would have

been better off last year if I had regularly snuck off to the movies during market hours.

http://www.berkshirehathaway.com/letters/1998pdf.pdf

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I think if you're owning a "moat" firm, you should pretty much "never" sell, if you feel that the firm is going to compound value and keep on growing (check out the FIZZ thread in this section!). On the other hand if you're using a "buy cheap and pray it works out" philosophy, then you should probably start selling as it nears IV.

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I think if you're owning a "moat" firm, you should pretty much "never" sell, if you feel that the firm is going to compound value and keep on growing (check out the FIZZ thread in this section!). On the other hand if you're using a "buy cheap and pray it works out" philosophy, then you should probably start selling as it nears IV.

 

Good lord.  Let me translate your post:  buying moat firms is good, buying cheap and "praying" it works out is bad.  The pejorative tone you use to describe a method of investing that has worked through every kind of market since the Great Depression shows an ignorance on your part that is startling.  Please read something - anything - from Graham.

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I'm not sure why you've decided to attack my posts, which you've repeated over the past few days, what I have stated is pretty standard, why you'd take it personally, I'm not sure.

 

I get it, according to you, nothing outside of discount to intrinsic value is important, that's fine, but you don't need to tail my posts, nor do I need to hear lectures, I have read Graham.

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I'm not sure why you've decided to attack my posts, which you've repeated over the past few days, what I have stated is pretty standard, why you'd take it personally, I'm not sure.

 

I get it, according to you, nothing outside of discount to intrinsic value is important, that's fine, but you don't need to tail my posts, nor do I need to hear lectures, I have read Graham.

 

I'm attacking you?  I thought it was called a debate on topics of mutual interest.  How responding to a post is tailing, I am not sure.  What you have stated is fairly common, but you state it in a more pejorative way than most. 

 

How you could believe that discount to intrinsic value is of limited importance is interesting.  Both Graham and Buffett are looking for discounts to intrinsic value, it's just that the methods of determination differ.  You show absolutely no sign of having read Graham.  Nothing personal.

 

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I did not ask you to evaluate my knowledge of Graham or Buffett, nor do I care whether you rate it or not. Furthermore, I never stated that discount to intrinsic value of little importance. Nice strawman though. I stated my opinion, your response was "Graham said no". Great.

 

 

Nothing personal.

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When to sell is always something I struggle with as well.  If I paid a good price, I have found that it's sometimes best to never sell, which a few of you have mentioned.  However, when I'm investing in an arbitrage situation, obviously there is a time to sell.  Regardless, it's something I think most investors struggle with over time.

 

To help me remember what can happen over time, I have one of my first investments typed up in a word document. I bought JNJ close to 25 years ago.  I would love to say I knew what I was doing then and bought it based on incredible research, but I didn't. I have continued to hold it through all these years (even added a little during certain periods of weakness) and with the current dividend of $2.44 I am receiving a 12.5% yield on my original (and largest) part of my JNJ investment. 

 

When I go back and read my notes, it reminds me that I need to think twice before selling.

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bmichaud,

 

Good question and I wish I had the foresight to reinvest the dividends in JNJ over time.  However, I didn't.  Fortunately, though I have not taken any capital out of this account over that same time frame i.e. I have reinvested the dividends in other stocks over time. 

 

My total return with dividends reinvested in JNJ would have been close to 2600% or roughly 14% a year.  In reality it has been closer to 2000% or roughly 13% a year.  Fortunately Bloomberg allows me to figure these things out pretty quickly. 

 

 

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That's about what I calculated based on the info you gave. So it is an interesting exercise when it comes to the sell decision - there is a good number of "high quality" stocks out there that would likely generate that type of a return if one just bought and forgot. Really the sell decision comes down to the rate of return one desires. Ya we can be Buffett clones and hold BAC "forever", but once it reaches a reasonable estimate of fair value, it is likely a great sale opportunity, as it most likely wont be a 15% terminal roe type company....and as Munger says, it almost doesn't matter what the purchase price is over the long run, as returns ultimately converge to returns on capital.

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You guys are mostly on the money.

 

I have a couple of sell regrets.  I bought Leaps in SBux, AXp, and a couple of other companies in March of 2009, at their generational lows.  Had I just converted the Leaps rather than selling I would have made more on those two stocks than the others I have bought since. 

 

Now, my reasons for selling were likely related to the macro environment at the time, being unstable.  SBUX, I bought leaps just under $10 - its a moat.  AXP, I bought leaps at the very bottom - the stocks on both are up 5 to 6 fold in 4 years.

 

I am determined to keep some of my deep value moat, or weak moat stocks going forward.

 

I have managed to hold RBS preferreds that are yielding around 16-18% dividend on purchase price.

 

Seaspan is yielding around 12% on pp, so far.  Not likely to sell anytime soon.

 

As to BAC, WFC, And JPM, I see these as return to value/ weak moats.  I will hold them until the overall market is very clearly frothy, they are bringing in obscene profits, and we are hearing about

some sector where ridiculous lending is occurring.  That should be an obvious point and is still very far away. 

 

Aig I will hold until it is trading on par to other "good" P&C insurers - 1.2-1.3 book at this moment in time, which would be around $80 per share. 

 

Its really hard, patient work to develop good positions.  I am more hesitant than in the past to trade what I have gotten to know for something I dont know.  I am working on the premise it takes me a couple of years to get to really know a company - this is the area where my greatest all time hits have been.  My biggest gains have never come from Graham stocks except where Graham and Buffett merge.

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