THE FAIRFAX WANNABES INVESTMENT CLUB

When To Sell

Introduction:

• Warren Buffet's theory on selling "Never", which is probably too extreme for most of us.
• With each sell action, need to make 2 right decisions.
  1. Sell stock A.
  2. Find stock B which offers low downside risk and more upside than stock A.
• Consider costs like taxes, commissions, on average after taxes and commissions, 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 management, not the glamour of the business. Look at RPM. It's 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 Dont's

• 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