- Review each stock at the end of the year in your portfolio and
see what it's potential for doubling is, in the next five years.
- Ensure good diversification by industry and size and the ability to double in value by the next market peak.
- Keep it as a "memory jogger", PMG designed to check where each of
your stocks is in relation to where the SSG says it should be.
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- With each sell action, need to make 2 right decisions.
- Sell stock A.
- Find stock B which offers low downside risk and more upside than stock A.
- Consider costs too like the taxes, commisions, on average after taxes and commisions
,a stock must register a 37% gain before you even begin to make money.
Reasons to sell:
- could be personal or to improve the portfolio.
- Adverse management change. New management is difficult to assess, but analysts could provide
clues.
- Declining profit margins. This is a leading indicator of corporate problems. There is no
such thing as one bad quarter.
- Deteriorating corporate financial condition. Too much debt could cause trouble by causing
default on interest payments and other obligations in a slowing economy. Check the impact of leverage.
- Competition is affecting profits. Nobody has monopoly over a product. Do not chase "in" industries.
Look at the ability of the management, not the glamour of the business. Look at RPM. It business
is specialty business, which is not a very exciting business. But the management has beaten earnings
and sales for 47 years.
- Dependence on a single product. If the company depends on a single product, that company will
not last long once the growth slows.
- A stock's quality changed as economic circumstances change. Quality of a stock comprises of
size, financial condition, consumer acceptance, market share, effectiveness of research and depth
of management. But say raw materials triple, the quality attributes are still good but
the changed economic situation has changed its quality as well.
- Securities that have proven to be cyclicals and that have a recent history of slow growth
should be sold when the economy peaks.
- To maintain balance by company size in your portfolio. 25% in companies with $2B or more
, 25% in small caps with less than $500M in sales and rapid growth rates and 50% in mid caps.
Selling Don'ts
- Don't sell just because the price hasn't moved. One of the cardinal requirements of investing
is patience. Do not concentrate on price, instead concentrate on fundamentals. Fundamentals will
carry the price higher.
- Don't sell because of a paper loss. But a stock well worth keeping can go down 10-20% in a
declining market.
- Don't sell because of a paper profit. Might be tempted to sell as soon as it doubles, but
they might post 2000%, 3000% returns which might be lost by selling too early. Concentrate on the
fundamentals. As long as it meets the criteria you have established, hold onto it.
- Don't sell on temporary bad news.
- Don't sell just to take action, be patient and wait out the market.
- Don't sell a stock that has fallen so far that your downside risk is minimal compared to the
upside potential.
- If you are unsure about selling, hedge your decision by selling half and keeping the rest.
Other Notes
In a small portfolio($100,000), a single issue should not account for more than 20%.
In a large portfolio(>$100,000), a single issue should not account for more than 10%.
If sales and earnings continue to meet or exceed your minimum requirement, and if the pre-tax
profit margins are rising, consider selling only if the PE exceeds one and a half times the
historical PE. And even then, you might find reasons to hold onto the stock. Don't sell too quickly.
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