When to Sell Stocks: 2 Simple Ways to Avoid Regret

Here are 7 smart ideas on when to sell stocks, you should know about:

1. Joel Greenblatt

QualityAverageGood
ActionTrade itInvest in it
Game planMean reversionFundamental momentum
ExampleCharter Medical1Joel Greenblatt, You Can Be a Stock Market Genius, 1999 ed., Ch 5Amex
Trigger # 1Attribute widely knownNA. Hold
Trigger # 2Fundamentals worsenNA. Hold

To Do

  • When you see a bargain, first buy.

Later, determine what kind of business you’ve bought.

For the average quality business, you sell once the sine curve is done. But, for the good quality business, you continue to hold on for the additional journey of the J curve.

For both types of businesses, you want to hop on at the bottom of the sine curve. And ride its upwards movement.2To do: 2 Types of Curves | Search Strategy

  • So called “growth” investors look to ride only the J curve (available in good quality businesses).

Warren Buffett looks to ride both the sine curve + the J curve. Example: Coca Cola.3To do: William Thorndike, The Outsiders, Ch 8

2. Warren Buffett

  • When to sell is a tougher question than, when to buy.4Launch of Berkshire insurance in India, 2011, YouTube video, 10:10
PortfolioMoreFactor 1Factor 2Factor 3Raise Cash
SmallIdeasOthers cheaperBy a lotCan figureNo
LargeCashHolding costlyBusinessPeopleOnce

Small sums of money: I had more ideas than money. Had a portfolio. If I found something was more attractive (which I felt I understood) by a significant margin than something I held, I sold the latter.

I looked for the cheapest, among things I understood.

I’d sell things that were still cheap, because the market was generally cheap. But, only to buy. Never to raise cash.

Large sums of money: Now money outruns my ideas. I sell something only if I lose confidence in:

  1. The future economics of the business, or
  2. The quality/integrity of the management, or
  3. It becomes dramatically overvalued.

And, that doesn’t happen very often. I work with large quantities of stock, so can’t move in and out easily.

So, now I don’t sell something still attractive, to buy something even more attractive.

References

References
1Joel Greenblatt, You Can Be a Stock Market Genius, 1999 ed., Ch 5
2To do: 2 Types of Curves | Search Strategy
3To do: William Thorndike, The Outsiders, Ch 8
4Launch of Berkshire insurance in India, 2011, YouTube video, 10:10
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