Why Knowing How to Sell is Important-Part III
Steve Cook on Disciplined Investing

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  • Make money by accessing all our Portfolios, the supporting research and Price Disciplines using our paid subscription blog, Strategic Stock Invetments. Our work is focused on making money for our Portfolios not as some academic exercise in Internet investing. Check our performance (audited)--our Dividend Growth Portfolio has beaten the S&P by 500 basis points per year for the last seven years but with a beta of only .62. (Mandatory Disclaimer: past performance is not a guarantee of future results.) We give you everything you need to duplicate our results, in particular, a strict price discipline for both Buying and Selling.

Have You Seen This?


Economics

   This Week’s Data

    The NY State manufacturing index fell to -9.4 in June versus expectations of -3.0 and -4.6 recorded in May.
    http://www.calculatedriskblog.com/2009/06/empire-state-manufacturing-conditions.html

   Other

    The monetary base continues to soar, the latest chart from E F Hutton:
    http://efhutton.blogspot.com/2009/06/monetary-base-continues-to-soar-graph_12.html

    A detailed look inside the unemployment stats:
    http://www.ritholtz.com/blog/2009/06/unemployment-friday/

    A different approach to the inflation/deflation argument:
    http://suddendebt.blogspot.com/2009/06/deflation-v-inflation.html

    Sheila Bair: the banking crisis is not over:
    http://www.forbes.com/2009/06/12/shelia-bair-fdic-business-beltway-bair.html

    Who’s buying all those Treasury Notes?
    http://www.calculatedriskblog.com/2009/06/setser-who-bought-all-recently-issued.html

    Pessimism from our CEO’s:
    http://mjperry.blogspot.com/2009/06/chief-executives-no-recovery-soon.html

    And from Paul Samuelson:
    http://gregmankiw.blogspot.com/2009/06/paul-samuelson-great-economist-and.html

    Fodder for the pessimists:
    http://www.econbrowser.com/archives/2009/06/do_you_see_what.html

Politics

  Domestic

The government’s new proposed ‘fat’ tax:
http://www.american.com/archive/2009/june/a-fat-tax-that2019s-hard-to-swallow

    Is increased healthcare spending optimal?:
    http://gregmankiw.blogspot.com/2009/06/is-increased-health-spending-optimal.html

    The Dem’s dilemma--how to pay for their healthcare program:
    http://online.wsj.com/article/SB124476309180208203.html

    And a look at a possible solution:
    http://www.stltoday.com/stltoday/news/stories.nsf/editorialcommentary/story/6150D842268AC879862575D1008041C4?OpenDocument

    Finally, somebody in the judicial system upholds the rule of law:
    http://www.powerlineblog.com/archives/2009/06/023797.php

    More on Obama’s ‘pay-go’ ruse:
    http://www.powerlineblog.com/archives/2009/06/023792.php

    Here is part of the problem with our education system:
    http://mjperry.blogspot.com/2009/06/lazy-summers-short-days-fewer-weeks-in.html

  International War Against Radical Islam

The Market
    
    Technical

    Cyclical or secular bull market?:
    http://www.ritholtz.com/blog/2009/06/cyclical-or-secular-bull/

   Fundamental
   
     Investment Thoughts--Knowing how to Sell is Critical, Part III    

Every once in a while, we all get lucky.  How do you insure that that bit of luck ultimately accrues to your benefit?  By taking money off the table after a strong price move.  You don’t have to Sell it all.  But get your original investment out.  Then as long as the company/stock continues to perform, you can let your profits run.

In our Portfolios, we do roughly that.  Our Valuation Model constructs a Valuation Range for each stock in our Universe.  It is a dynamic model in that it is always moving based on a company’s financial progress and macro economic forces.  But at any single point in time, there are always three price points for every stock: a Buy Price (we’ll talk about that next week), a Stop Loss Price (we covered that last week) and a Sell Half Price (this week’s discussion).

The Sell Half Price is the part of our Discipline that forces us to take profits, even though stocks inevitably hit that Price when the Market is smoking and good times seemingly are going to last forever.  Selling when optimism reigns supreme is just as tough as Stopping a Loss.  But it has to be done.  Intuitively we all know that economic expansions, favorable product sales trends, etc. don’t go on forever; but few have a systematic way of dealing with this fact. 

Our solution is to set a Sell Half price based on a company’s earnings projections coupled with its stock’s historical relative high price earnings ratio and beta (historical volatility).  When a stock’s price trades to this pre-set level, we take enough money off the table to reduce the size of the holding to normal.  That usually involves Selling anywhere from 33% to 75% of the position.

We don’t Sell the entire holding because as long as the underlying company’s fundamentals remain strong--most importantly, as long as the company raises its dividend consistently and maintain the financial strength to continue to do so, then the original thesis for owning the stock hasn’t changed.

The point here as it was with the Stop Loss Price, is not that our way of valuing stocks and picking the right Sell Half Price is necessarily superior to anyone else’s.  The point is having a well thought out Discipline in place to force yourself to take money off the table (and protect your principal) at a time when it is emotionally the most difficult.

    News on Stocks in Our Portfolios

    A positive write up on Abbott Labs (Dividend Growth Portfolio):
    http://seekingalpha.com/article/143221-the-long-case-for-abbott-laboratories

    A positive write up on Reliance Steel (Aggressive Growth Portfolio):
    http://seekingalpha.com/article/143113-reliance-steel-aluminum-down-but-not-out










Posted 06-15-2009 8:18 AM by Steve Cook