10-08-2015, 11:47 PM
(This post was last modified: 10-08-2015, 11:48 PM by Dividend Watcher.)
I have several guidelines in my business plan that directly address selling on overvaluation: (1) consider selling a portion of the investment when it becomes over 8% of the portfolio or (2) the P/E (excluding extraordinary charges) exceeds 24, and (3) strongly consider selling the entire position when it becomes seriously overvalued. This includes a P/E ratio greater than 30 or greater than 200% of the average P/E for the trailing 10 years.
The goal here is to take the profits on something that is priced by "irrational exuberance" rather than fundamentals and to prevent one or two stock(s) from dominating the portfolio. Since our retirement accounts will be needed to supplement our income, I don't want to jeopardize the income stream should a problem arise. Of course, there are some caveats here. One is the admonition to try and have something more reasonably priced to replace it. The other is for those companies that are in the "special situations" category. Unspoken is the goal of minimizing transaction costs and being whipsawed in/out of a position by short-term circumstances.
I'm less tolerant of overvaluation of utilities rather than other C corps only because of the slow growth nature of the business. C corporations also have the luxury of being more flexible in how they make their money.
All that to say that I have sold partial or the entire positions for overvaluation before and would do it again in the right circumstances. KenBob, what surprises me is your willingness to trade more in a taxable account rather than in a retirement vehicle. I guess if your formula gives you enough margin to make it worthwhile to book the profit, then it makes sense to trade when you feel necessary.
The goal here is to take the profits on something that is priced by "irrational exuberance" rather than fundamentals and to prevent one or two stock(s) from dominating the portfolio. Since our retirement accounts will be needed to supplement our income, I don't want to jeopardize the income stream should a problem arise. Of course, there are some caveats here. One is the admonition to try and have something more reasonably priced to replace it. The other is for those companies that are in the "special situations" category. Unspoken is the goal of minimizing transaction costs and being whipsawed in/out of a position by short-term circumstances.
I'm less tolerant of overvaluation of utilities rather than other C corps only because of the slow growth nature of the business. C corporations also have the luxury of being more flexible in how they make their money.
All that to say that I have sold partial or the entire positions for overvaluation before and would do it again in the right circumstances. KenBob, what surprises me is your willingness to trade more in a taxable account rather than in a retirement vehicle. I guess if your formula gives you enough margin to make it worthwhile to book the profit, then it makes sense to trade when you feel necessary.
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“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan
“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan