The 5 Rules For Selling Value Stocks

The next most important question people ask is when they should sell the stock to take their profits. When you need the money? When the price has gone up by 20%? 50%? 100%? Well, as a value investor, you cannot just look at the price to determine if the stock should be sold. You must look at the price in relation to the intrinsic value of the stock. Even if a stock price increases by twenty times, you should still not sell if it is undervalued. This is because when you own the stock of a company that is consistently increasing its earnings & cash flow, the value of your stock will keep increasing over time! By holding on to your shares of stock, you enjoy the power of compounding.

Here are the 5 rules to help you decide when is the right time to sell your shares.

Sell Rule #1: Sell When The Stock Becomes Overvalued
During a strong bull run or during a period of renewed investor optimism, the price of your stock may rise so fast that it begins to overtake its intrinsic value. When you find that your stock is way over-valued, it may be a good time to sell and take your profits.

Sell Rule #2: Sell When the Business is No Longer Great
Even the greatest businesses can lose their greatness one day. This is why you need to regularly review the financial performance and health of the stocks you own once every quarter (when the financial results are released). If you notice a negative change in one of the first seven criteria for value stocks and the change does not seem temporary, then you should sell your shares immediately.

Sell Rule #3: Sell When You Need the Money for a Better Investment

Another reason to sell is if you happen to identify an even better company that is selling at an even bigger discount to intrinsic value. Even though your current stock is still good, you may want to sell, take the proceeds and put it into an even better investment.

Sell Rule #4: Sell When the Stock Reverses into a Downtrend
All great stocks may reverse into a period of downtrend from time to time. It could be the result of some kind of bad news that has hit the company (e.g. new product failure) or the market as a whole or it could just be that professional investors have lost interest in the particular stock or sector for the moment. Even if the company is still great and even if the stock price is still undervalued, I highly recommend that you sell the stock at this time. This is because once a stock goes into a downtrend; there is no telling how low the stock will continue to go.

No matter how great you think the stock is or how cheap the price is, you should not fight the short-term psychology of the market. One thing I have learnt is to never fight a trend, it is just too
powerful to be ignored. However, once the downtrend weakens and the stock price begins to stabilize again, it would be wise to re-enter and buy back all your shares at an even lower price!

Sell Rule #5: Sell If the Stock Price Drops 20% Below Your Purchase Price

This final rule is known as a cut loss rule. Although it is usually ignored by emotionally-weak investors, it must be religiously adhered to by all investors who are serious in making consistent profits over time. So, why sell a value stock if its price drops 20% below your initial purchase price? Well, if the stock you are buying is truly undervalued, then it should not drop in value by another 20% or more. If it does, then there could be a possibility that there is something wrong with the company that you do not know. Remember that no matter how great a stock picker you are, you will still make mistakes and pick bad investments. The greatest investors in the world know that they can never be right all the time. The important thing is to minimize their losses when they are wrong and maximize the profits when they are right!