As a value investor , when do you sell?

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I have been thinking about this lately.
In the books and articles of Value investing it is generally mentioned that the holding period of a stock for a value investor is eternity. We should only sell stock if business has some permanent flaws. And we should wait for compounding to take place.

However, I think that compounding doesn’t happen generally by staying in single stock for 4-5 years ( I mean upwards of 100% increase ).
What I think is that it is better to sell a stock which has raised 30% in 1-2 years and then find for other opportunity . In this way compounding seems logical.

I want your thoughts on how do you see this?

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Hi, I slightly disagree with you. I don’t think that you should exit at 30% profit, because when you do that, you will miss out on potential multi-baggers. And the opportunity costs (i.e. other stocks which you would rather invest your money in, after exiting the former, has no guarantee of bringing you more money, in fact you can even lose money).
I read somewhere where a very good value investor said that, every day that you are holding a stock, you are effectively making a buy call - because you are not selling it. Let’s say you bought something at Rs. 100 and it goes to Rs. 150, if you are still holding that stock, then you are effectively making a buy call at Rs. 150. And you should definitely do this if the fundamentals still look bright, and the valuation is still reasonable at Rs. 150. Just a stock doubling or going even 5x is no reason to sell, because every 100x stock will go through periods of 2x 3x 5x

Warren Buffett, and even many other value investors have explicitly laid out their reasons for “when to sell a stock” . Warren Buffett has mentioned two main reasons:

  1. When he sees a more attractive opportunity (the opportunity cost that we discussed above)
  2. When the fundamentals or the economics of the basis changes (lets say the company has started taking a lot of debt for capex, or decreasing free cash flows, decreasing profit margins, etc.)

Dr. Vijay Malik, who is a reputed investor has also written a very nice article about this in detail on his website: https://www.drvijaymalik.com/when-to-sell-stock/?highlight="when%20to%20sell"

Thanks!
I would love to hear other thoughts on this and counter opinions.

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I bought Pidilite in 2014 at around 300 levels. I am still holding those . Had I been wiser, if I sold those at say 2X, 3X or 5X ?

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Investing, long term, means we are participating in a business and are not just buying shares, and as such, the focus in on the business. There have been many threads in VP where in some members have followed the businesses and stayed invested in thick and thin for years and years. Not that this approach is suitable for all, even affordable by all, but long term in essence is that. Invest in a business, follow the business until it stops performing, not that we will be rewarded always, but that is a chance we take, and we may build the position slowly or at once.

And as we do this, we get to know and experience a lot of things, learning wise, capital wise, return wise, allocation wise, loss wise, opportunity cost wise etc etc, and the next investment hopefully will be a better bet.

So, what I think is that, this is a journey, if we want it to be.

There are many investors, who apply the same principles for a shorter time period, who have understanding of the overall macro and micro picture, do top down approach, and participate in the theme, or in the company, for 2-3 years, and as these are knowledgeable and experienced investors, they will be ready with their next idea, and continue their journey.

Then there are investors who stay in the stocks for mere months, their churn is big, they may not necessarily lack patience, but it is their style, they may make a quick 30% in less than a year, and as they too think of it as investing and know the business, they invest more, and as such a 30% return in 1 year is very good.

We have all kinds of members in VP, it has helped me to know about their styles, it gave me a perspective.

And having these many ways to invest is for good. We can pick whichever suits our situation, capital, return expectation, risk affordability etc and do it. I think market is essence is this, participants with different perspectives, different holding periods, different return expectations etc.

While I do acknowledge, read, learn and appreciate the vast market teachings by all the great investors and traders, real time experience is more nuanced, like Mahabharata, the market is so vast, and the learning is so different, it cannot be explained by one investor or trader.

Have some basis, have some ground, start laying bricks, go forward, give it some time, destroy everything if found fault, or build more as it is fruitful, and as time progresses, see it takes a shape, see how it grows, and if there is a smile on the face both in terms of learning and return, I guess we have made it.

Just some random thoughts, hope there is coherence.

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I understand your thought. But the problem is that not every company will be like pidilite . The risk reward ratio seems to be too much skewed towards risk side

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Insightful thoughts. It is indeed true that market is filled with investors by who have different be styles. Over the time I have started appreciating this fact.

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Nicely put. I agree all the texts say the same regarding holding a stock. But overtime , I have realised that practically if the company has increased 2x or 3x . It becomes even harder for it to increase more. Any more growth needs a radical shift in company strategy and approach towards business . However how I am thinking may not be the thought of others.
That’s why I wanted to know personal experiences with the conundrum of when to sell.

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as long as company is growing, fundamentals are intact there is no reason to sell. % contribution to portfolio is another factor which can be considered, say if a single stock is going above 40-50% of your portfolio

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Great thread. Personally I find it easier to decide when and what to buy than when and what to sell.
My sell decisions have nothing to do with my buy price. I have 3 triggers to sell:

  1. Loss of confidence in the business or the management.
  2. Massive overvaluation, thus reducing the prospects of returns even with blue skies scenario.
  3. Requirement of capital to invest in a much better opportunity.

Conceptually these may be sound, but getting it right is still not easy at all. I suppose it’s inevitable that in a long investment journey, there will always be some that were dumped too soon and some that were held too long.

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This is quite nicely explained! I think point 2 or point 3 are as much important as point 1. Conversations around value investing are highly focused on point 1 only.

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Problem is not with selling. But with the opportunity. They do not exist as most commentators say.
usually your top holdings will make disproportionate alpha in your portfolio. selling those will be harakiri. as they say be lazy. very lazy.

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What r ur views on my portfolio strategy where i try to keep weights of all my 25 stocks same…So no top holdings with more weightage?

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Its awesome method. great for asset allocation and managing drawdown risk. is this best factor to generate alpha? not sure. Also this is too much work for lazy investors like me :slight_smile:

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Its not much work…Just always add equally among all stocks. Treat them equally like our kids, without any favouratism to anyone

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what happens when one goes down by 2.5 percent and because of that something else is more than 5 %. do we re-balance weekly. monthly? if i delete one which one do i add? i will have to maintain a watch list of replacements.
might as well buy in equal weight index fund.

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Index will be fixed set of companies. In our portfolio, we can choose our favorite stocks. Also in index fund, lot of churning is there. At every 3 months or 6 months, addition/ deletion will happen. We can sit with our companies for even a decade and more

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Hello Sachin, I had similar thoughts and the decision to sell has been very very tricky for me. I am fairly new to the market, got into direct equity only during the lock down. In the three years of holding 19 stocks I have sold only once. I have watched my portfolio go up and then down all while sitting on the sidelines.

I think what you are saying is close to what momentum investing is all about. You book profits and then re-invest in the next company that has momentum. And you cut your loses early. You book profits only when the stock is losing momentum. Do look into some momentum investing strategies.

I did some back-tests and what I found is that momentum investing will work only if you commit to a strategy. You cannot do it a little here and there, you have to stick to it and then it will beat the index. This is not for me, at least not at the moment, so I am back to sitting on the sidelines.

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Thanks for a different insight. Yes this strategy may come under purview of momentum buying - selling. I will read about it. But I am more concerned about over valuations than the stock losing momentum in market.

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Hi Sachin

While I don’t know and no particular strategy is right or wrong but with my investing experience of 12 years have realized that there is lot of wisdom in this line “the best time to sell the stock is never”.

If you have done the selection well (right management, good opportunity size etc) and if you can then best holding period is forever.

I did an interesting analysis and found something insightful which is the reason for above. I have been buying selling stocks since 2011, other day I just did comparison to see at what Market cap I bought the stocks and what would happen if I had held on to them as in what is the Market Cap today (I choose Market cap and not share price as Share price has to be adjusted for splits and bonuses etc.)

What I found is that while some stocks like (Rolta, Ess dee Aluminimum, Guj Auto Gears) would have destroyed lot of my wealth however others like (IGL, Titan, Astral, DHP, BSE, ICICI Bank) would have created multiple times wealth if I had held on and not been smart to sell at 30%, 50% or 100% profit.

Even at Portfolio level my profits would have been 5x more than what I have booked in last 12 years and would have saved me some brokerage and STT too :slightly_smiling_face:

I hope this gives you and other readers a perspective and would also encourage some more people to do this analysis and share their findings.

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I see only if there is a financial need or if the stock loses more than 30% of investment. I am very happy to hold forever if the above 2 criteria are not triggered.

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