I think first of all while holding a company we have to slot it into what kind of business it is based on the expected opportunity size, variables affecting the business, sectoral tailwinds/headwinds, and the kind of predictability and sustainibility in earnings expected with the company. Besides other parameters we use ourselves in slotting businesses.
If we feel that the business we hold falls into top class i.e A plus kind of business it might make sense to keep holding through minor price drawdowns of 20-25%. Unless there is a major market meltdown these top class companies wont correct more than the above levels from the top. In case of major market drawdowns usually all hell breaks loose and even these correct to a large extent and in that case we cannot do much. When markets recover these make lost ground very quickly.
If we find that the business in question is not top class then it has a definite sell price and that is what we have to decide based on our assessment of business. In my own mind I had fixed an exit multiple of 25-30 PE for avanti as I felt that some or other variable would ultimately come back to haunt the business. These are businesses which one buys at a certain valuations and sells at certain valuations.
We have a whole thread about slotting businesses into different categories. Again from time to time these lists would have to revised based on the sectoral tailwinds/headwinds. Case in point being pharma space where Ajanta was once considered invincible and in A plus category but now with the meltdown in the pharma space has lost its place.
I think in the Indian market context as of now, consumer durables, , B2C good quality businesses, solid private banks, good quality NBFCs, FMCG etc could be considered as A+ businesses.
What happens is that when prices in a not so great business start going up investors and the market as a whole start believing that its a great business and lulls the investor into complacency.