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Value investing: When to sell?

Mar 7, 2006

With the indices in the new orbit, volatility has become the name of the game. From a value investor's perspective, however, such volatility should be the cause of least botheration as over a period of time (the longer the better), the element of volatility eradicates. Does that mean an investment made should never be sold. Well, ideally this is true! When the legendary investor, Warren Buffett was asked about his optimal holding period, he said, "Forever!" So what should be the reasons or when should a value investor consider selling his/her holding(s). Ideally speaking, the factors that drove the value investor to invest in/avoid a particular stock, should be considered for determining when to sell and which stock to sell. In this article we shall have a look at some of such factors. Broadly speaking, the factors can be classified into three categories.

Company specific factors: This includes a host of reasons, right from a dubious management (judged by its behaviour, its past track record of promise versus performance, executive compensation packages, especially in trying times), complex accounting with vague disclosures (a lot of notes following the standard rules of disclosures specified by the regulating authority) to worsening cash positions or increasing working capital.

Industry wide factors: Again there are a lot of factors that should be considered - like cyclicality, company's inability to cope up with increasing competition (domestic as well as global) and rapidly changing technology, government control/decontrol and declining returns.

Valuations: As far as equities are concerned, valuations are the culmination of the entire investment process. An investment decision should be driven by prudence, which is the ability to determine whether the valuation commanded by a stock is fair or not. In simpler terms, investors should ask whether the current price is supported by the expected growth.

Having said that, when a bad patch seems temporary in nature, a value investor should not panic. However, this requires a strong faith in the ability of the management to tide over the crisis.

To sum up...
For a value investor, a sell decision should not be driven by swings in stock prices. Rather, it should be based on consideration of the above-mentioned factors. Also, when convinced about a decision whether to buy or sell a stock, a value investor should be disciplined and not try to time the markets.

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