11-07-2013, 01:38 PM
This is another great topic.
I'm usually of the mind that I'm going to buy and hold these stocks for decades. And my plan is to buy when I think valuations are good, so there is a margin of safety. But while it is hard to time a buy decision, I think the sell decision is even harder.
There is a good argument to sell when your shares have become overvalued. This is not the same as saying that your stock has had a strong run up in price, however, and the distinction is important. If I buy AFL in the $40s, believing it to be significantly undervalued, and I think it is fairly valued, or still slightly undervalued, in the $60s, then it would be silly for me to sell in the $60s just because of the strong run. Now if it gets to the $80s and I think that is noticeably over-valued, that is when there is a tough choice to be made for a dividend growth investor.
Graham and Buffet and their ilk have been wildly successful buying when undervalued and selling when overvalued. And it couldn't seem any simpler than that. And while I am reasonably confident that I can spot undervaluation, I am not as confident with overvaluation. While they would seem to be two sides to the same coin, I think there is a big difference. When you make a buy decision, and you are dealing with a quality dividend growth stock, time is on your side. Even if you were a bit wrong about the valuation, you should do just fine over the many years ahead that the company has to grow its earnings and dividends, with the share price in tow. It is not the same with a sell decision -- if you're wrong and the stock is not overvalued, you miss out on the future growth of the company. Moreover, if you believe in staying mostly invested, you need a better place to put the cash than the company that you sold. In a down market where there are opportunities aplenty, this might be no problem at all. But when prices are up generally, it is harder.
On balance, then, although I see the logic in it, I personally have not yet been interested in selling off any of my winners. I've only sold where I see problems with the company or my original thesis in buying the stock has proven incorrect. My plan on buying is to hold for decades and enjoy the growing income stream, and I'll take a run-up in price as validation of the buy decision, but not as an invitation to part ways with the stock.
On the other hand, if I had no dry powder, had something that felt overvalued to me, and there was a screaming opportunity that I was dying to jump on, I could see making the move. Or I could see selling off a portion of my portfolio generally if we found ourselves in another dot-com-type mania.
I'm usually of the mind that I'm going to buy and hold these stocks for decades. And my plan is to buy when I think valuations are good, so there is a margin of safety. But while it is hard to time a buy decision, I think the sell decision is even harder.
There is a good argument to sell when your shares have become overvalued. This is not the same as saying that your stock has had a strong run up in price, however, and the distinction is important. If I buy AFL in the $40s, believing it to be significantly undervalued, and I think it is fairly valued, or still slightly undervalued, in the $60s, then it would be silly for me to sell in the $60s just because of the strong run. Now if it gets to the $80s and I think that is noticeably over-valued, that is when there is a tough choice to be made for a dividend growth investor.
Graham and Buffet and their ilk have been wildly successful buying when undervalued and selling when overvalued. And it couldn't seem any simpler than that. And while I am reasonably confident that I can spot undervaluation, I am not as confident with overvaluation. While they would seem to be two sides to the same coin, I think there is a big difference. When you make a buy decision, and you are dealing with a quality dividend growth stock, time is on your side. Even if you were a bit wrong about the valuation, you should do just fine over the many years ahead that the company has to grow its earnings and dividends, with the share price in tow. It is not the same with a sell decision -- if you're wrong and the stock is not overvalued, you miss out on the future growth of the company. Moreover, if you believe in staying mostly invested, you need a better place to put the cash than the company that you sold. In a down market where there are opportunities aplenty, this might be no problem at all. But when prices are up generally, it is harder.
On balance, then, although I see the logic in it, I personally have not yet been interested in selling off any of my winners. I've only sold where I see problems with the company or my original thesis in buying the stock has proven incorrect. My plan on buying is to hold for decades and enjoy the growing income stream, and I'll take a run-up in price as validation of the buy decision, but not as an invitation to part ways with the stock.
On the other hand, if I had no dry powder, had something that felt overvalued to me, and there was a screaming opportunity that I was dying to jump on, I could see making the move. Or I could see selling off a portion of my portfolio generally if we found ourselves in another dot-com-type mania.