Value Investing: Holding onto Stock “Forever”

Today I’m going to talk about when to sell a stock.

But wait, I thought with the Value Investing strategy that you held onto your stock forever? Which is true, for the most part. 

This strategy of investing is a long term game. It requires extreme patience both when you’re wanting to buy a stock and then when it comes to selling it. Ultimately, you’d never sell it but that would assume that everything about that business stays exactly the same as it was on day one. And nothing ever stays exactly the same.

There are 3 main reasons you’d want to sell a stock

1. A Change to the 4 Principles
2. Greed/Fear
3. You Need the Income

A Change to the 4 Principles

Remember the 4 Principles to Value Investing:

1. You are capable of understanding the business you are investing in
2. The business has a natural quality to it that provides an advantage for it
3. The management of the business is honest and skilled
4. You are paying a fair price for the business

These are the roadmap for you to follow when you’re considering which business to buy and you need to regularly revisit your answers to these principles during the course that you own it. If any one of the answers to those 4 principles changes, you will want to consider if you should continue owning that business.

Greed/Fear

The stock market is manic depressive. Sorry, let me rephrase that - investors in the stock market have emotions and they can allow those emotions to influence their decisions, which causes the stock market to behave in manic depressive fashion. This can cause prices to shoot up and drop down. 

You don’t want to be swayed by the greed of the highs and the fear of the low which drives so many people's investing decision making. You are a value investor and have a systematic, steady approach so you can plan out what you’d like to do and then wait for the opportunity to take action. 

You bought the business with a margin of safety. When the price of that company approaches its sticker price, consider your exit price. Stay on top of the news about a company as you don’t want to ride the down wave of an event. You’d like to sell and then buy back in when the event has caused the price to provide you a large margin of safety. You want to make wise decisions based on sound information, not based on what other people are doing. 

You Need the Income

Congratulations - the day has come where you are able to retire and start living off your investment income. There’s lots of articles about how best to do this, but the general premise is that you’ll withdraw no more than 4% which will provide the money for your everyday life. Taking out only 4% will allow your investments to continue to grow and compound enabling you to live happily ever after. I’m very excited to get to this point one day soon!

So there you have it, the 3 reasons why you’d sell your stock.

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