“I wish there was a quarterly review possible in a marriage,” rued my wife after a small fight. “I also wish there was an exit clause,” she added, this time raising my interest levels.
Long term investing is a lot like a marriage.
For a peaceful relationship, you must be willing to…
- Commit for the long term
- Keep your ego and emotions aside
- Keep your expectations realistic
- Learn to say ‘no’
- Learn to take the blame
- Know that things could change and accept when they do change
- Have immense patience
However, there’s one big difference between marriage and investing.
You must not enter into a marriage with the thought of divorce in the future. But you must always buy an investment with a clear-cut exit strategy.
Buy and hold ≠ Buy and forget
The most successful investors go into an investment with an exit strategy in mind.
While buying an investment, they have a clear answer to the question – “When will I sell this investment?”
Warren Buffett once said, “Our favourite holding period is forever.”
But given what Buffett has done over the years, perhaps what he meant was, “Our favourite holding period is forever…but, in practice, we will sell if any of a number of conditions is met.”
You see, buying a good stock and holding it for 5-10 years is a great idea. In fact, most books on sensible investing have advised this strategy for long.
In essence, I think it is good advice. But I think it can be misinterpreted to mean ‘buy and hold…and forget…and never sell’.
The results of such interpretational error can be disastrous for investors.
To avoid such disasters, here are 10 reasons I personally use to sell my stocks, however attractive the overall stock market might seem:
- When I realize that I made a mistake in buying a stock.
- When a stock gets overvalued (its price moves much higher than its intrinsic value).
- When the business model of a company deteriorates.
- When the cash flows of a company deteriorate.
- When the debt on a company’s balance sheet crosses my comfort level (usually 50% of equity) and is expected to remain there for some time.
- When something happens to cast doubt on a company management’s integrity (like a bad diversification, or an overvalued acquisition).
- When the return on equity falls below 15% with no sign of improvement.
- When the stock surges at a rapid pace without any change in the underlying business fundamentals.
- When I identify a better opportunity (I sell the worst stock from my portfolio and reinvest the money in this new opportunity).
- When I need money for an emergency (I start by selling the worst stocks from my portfolio).
The bottom line
I use this 10-point checklist to review my stocks every six months or as situations demand.
In fact, I have this handwritten checklist pasted in front of my workspace…and it acts as a great and regular reminder that ‘buy and hold’ doesn’t mean ‘buy and forget’ (this is however valid only for my stocks, and not for my marriage :-)).
What about you? Do you have a clear exit strategy in place when you buy a stock? If yes, what is it? If no, why not?
I left a comment in previous article, this article clarifies my questions, Thanks Vishal. I don’t know about marriage but sounds like a tough deal.
You have a very nice exit strategy except the 10th point. For a planned life, we are anyway suppose to set aside an amount for emergencies, take a term plan, health insurance etc. So, emergency is something we should be prepared for, before investing money. Emergency fund could be in the form of liquid funds, bonds or deposits that could be redeemed.
I did not had an exit strategy until I lost money in the 2008 crash. The way I have planned now is that my portfolio consists 2 types of stocks. One that I will hold on forever (consists of high dividend yield, continuously growing businesses) unless something changes fundamentally, others that I will sell it when the market, sector and company becomes way expensive than what it should actually be. I would be interested to enter again provided they are below their intrinsic value.
Hi Mansoor, thanks for your feedback! Just a clarification – with regard to point #10, this money is something that I may need over and above the emergency fund (which is anyways around 6-8 months of my monthly household expenditure).
I think it’s wise to invest 10,000 each in best 200 companies over a period of time and forget. Think 10,000 each as your sunk cost and forget.
Even if two or three companies clicks in my portfolio out of 200 i will be a richperson.
When i say 200 companies, i mean invest in companies whose products we use(fevicol-pidililite, colgate, gillete, lux-hul, aasirvaad aata-itc, paracetomal-gsk pharma, kids books-navneet, titan etc).
The only expenditure we have to incure to find good investments opportunities is few litres of petrol. Full ur tank go for a ride look at most happening brands (exide, hero honda, sintex, maruti, mahindra, ashok leyland, niit, bajaj electronics, voltas, blues star, havells,) etc.
I missed two great opportunities once i visited gitanjali showroom (having nakshatra, gilli brands)with my wife in a mall i added gitanjali gems to my watch list at rupees 40(now 370) and one day when i saw my friend smoking charms cigar i added vst inds to my watch list at 450(now 1425).
What is the guarantee that the financial statements which we are reading are true and fair?(eg-satyam).
Financial statements may lie but the taste of products and brands would never lie, it’s completely reliable.
What do u think Vishal?
Hi RichFellow, hope your wife is doing fine now. Yes, the approach you’ve suggested for searching good companies (looking around for companies selling products we love) is what I believe is a great approach. Though I’m not sure if I’ll buy any of these companies at ‘any’ price. Having a watch list is also a good point you’ve mentioned here.
My wife is doing better-Thanks for the concern Vishal.
Hi Vishal
I am always confused when making a decision to sell companies which has promising long term growth with strong fundamentals (e.g. Infosys, ITC). If we had purchased the stock below its intrinsic value and if the stock price move up above its intrinsic value within a short span of time, do we hold such stocks or better to sell it (referring to point no.2 of your checklist) ……
Dear Ananth, please refer to this post I had written earlier – 10-Point Checklist I Use to Sell My Stocks.