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Author: xerohype Big red star, 1000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 24822  
Subject: LTBH V: When to sell Date: 9/26/2000 2:35 PM
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LTBH Part V

When to Sell a LTBH stock


by xerohype

Selling is about the hardest thing to do when investing in stocks. You have to put your pride on hold and look objectively at the future chances of the company you are thinking of selling.

First reason to SELL:

You have retired and you need the money to buy a Porsche, a dream house or a small island nation in the Pacific.

Enjoy your money, you worked hard for it, it worked hard for you all these years.

Second reason to SELL:

TMF says: Sell when you have a better place to put your money.

Let's say that, you own some stocks and you know with reasonable certainty that stock XXYZ will greatly outperform your holding ZZXY, then by all means sell ZZXY and buy XXYZ. Most of us can't be that sure.

Third reason to SELL:

If you follow the Gorilla Game then you sell following these rules:

Hold gorilla stocks for the long term. Sell only on proven substitution threat.

Hold kings and princes lightly, selling individual stocks on a marketplace stumble and the category upon deceleration of hypergrowth.

Once it becomes clear to you that a company will never become a gorilla, sell its stock.

Fourth reason to SELL:

If you follow the Rule Maker method:

Read this article by Bill Mann (TMFOtter):
http://www.fool.com/portfolios/rulemaker/2000/rulemaker000606.htm

The reasons cited there:
Some of the "Line of Death" reasons to sell a Rule Maker:

1. Crooked Management
We will not tolerate deceit from management. In fact, a company violating this standard is an outright sell. Less-than-honest management can rear its ugly head in many forms, including a criminal history, bad accounting, and hype-and-bail executives. We need not see the management break the law to determine that they are "crooked." The troubles facing MicroStrategy (Nasdaq: MSTR) and its 90% deterioration in price is a classic case of a company that used aggressive (and as it turns out, potentially illegal) accounting methodology to pump up its books. Not on my nickel, thank you.

2. Mergers & Acquisitions
When a Rule Maker is involved in M&A activity, you should re-evaluate the combined company, or conversely the leftover from a spinoff. If the new entity does not pass the Rule Maker criteria, a sell may be in order.

3. To Rebalance your Portfolio
I'm not a big fan of this one. But if you have a huge winner that grows to be an outsized part of your portfolio, you may wish to reduce the risk of most of your losses being attributable to one company. In hindsight, someone who did so with Qualcomm (Nasdaq: QCOM) in January this year would feel pretty smart right now. Someone who did so with Microsoft (Nasdaq: MSFT) in 1989 would not. Your call.

4. Flawed Original Purchase Decision
We all make mistakes. If you realize that in your original decision to invest you misjudged the business prospects or the Rule Makerness of a company, get out of it. It doesn't do you any good to hold a company if you later believe you made a mistake. Unring the bell and move on.

5. Company No Longer a Top Dog
Some companies respond well to competition, others fail to do so. A former Rule Maker is just that, a has been. Most has-beens do not make it back to the top, though there are exceptions, such as reborn Texas Instruments (NYSE: TXN). On the other hand, Bethlehem Steel (NYSE: BS) and Venator (NYSE: Z), the holding company for Woolworth, are great examples of former greats that have dimmed. They are yesterday's news, former kings of the hill. Those who hold such declining companies should not let avoidance of capital gains taxes drive their decisions. Avoiding taxes on an appreciated asset that now lacks potential for further growth is, in my mind, cutting off the nose to spite the face.

6. Deteriorating Financials
Even industry-leading Rule Makers are subject to the constant threat of declining product/service demand and encroaching competition. Whether the threat is external competition or internal stagnation, we rely upon the financial statements to show any signs of business weakness. Thus, we endorse checking up on the performance of Rule Makers on at least an annual basis, by reading the company's 10-K (or even better, all of the 10-Qs on a quarterly basis) and taking it through the Rule Maker criteria once again.


Deteriorating financials cuts to the heart of the matter specific to Rule Maker investing. The Rule Maker managers agree that failure to meet the RM Criteria for a prescribed period warrants a sell. We're prepared, with your assistance, to apply this methodology to our current holdings, and sell any that miss the targets. The rule of thumb we propose is "Four for Four." That is, a current holding that fails any four of the six quantitative tests for Rule Makers for four consecutive quarters is eligible for sale. This conservative nature recognizes the fact that even the best companies have down quarters, or even down cycles. But poor performance for a full year is reason enough to question the quality of any company, even one we bought intending to hold for decades.


Also see this 21 September article by TMF Oak, Smart Reasons to Sell:
http://www.fool.com/portfolios/rulemaker/2000/rulemaker000921.htm

Fifth reason to SELL:

With Fisher criteria pretty much sell almost never. If you found a proper Fisher stock, you will only need to sell when you need the money well into retirement.

Three reasons:
1. The main reason to sell is when your original Fisher analysis was flawed or when we have miscalculated in applying Fisher criteria due to faulty information.

2. The company no longer qualifies for Fisher criteria under the 15 points.

For example, under this rule we come to deficient management or a company exhausting growth in its market.

3. When a better investing opportunity (and we'd better be sure) comes by.

Sixth reason to SELL:

Jeff Fischer (TMFJeff) wrote this great article for the Drip portfolio on when to sell:
http://www.fool.com/dripport/2000/dripport000424.htm

Here are some of his reasons for selling a DRIP stock:
*Is beginning to consistently lose money rather than make it, or is consistently making less money than before or less than hoped for over a sustained time period.
*Is consistently accumulating debt rather than cash without apparent growth benefits (smart acquisitions can be made with debt).
*Is falling behind industry changes and management seems to be foundering.
*Has changed its focus or business to something that you don't understand or admire.
*Institutes unreasonable fees in its direct investment plan.
*Cancels its dividend payment without apparent benefit to the growth of the company, meaning that the dividend money saved isn't reinvested in the business for growth, but goes to finance debt or losses (this indicates that something is amiss).

Finally, consider selling if:

*You think you've found a better investment.

Seventh reason to SELL:

Stick with your sell discipline no matter what it is!

In the KP board joelinda1 makes that point here:
http://boards.fool.com/Message.asp?mid=13118080

You can also see some sell reports I posted in the KP board for some of my holdings:
http://boards.fool.com/Message.asp?mid=13318130

I set out a few possible sell rules for KARB and KARM portfolio candidates:

-Decrease in revenue growth rate to less than 20% year over year (see MSFT and INTC).

-Loss of confidence in management (SEC investigations, lying under oath, etc.).

-Increasing debt or shares more than revenue growth rate for RBs, decreasing cash /debt ratio over 3-4 consecutive quarters for RMs.

-Rising flow ratio over 3-4 quarters.

-Better opportunity seen in a new better growing market or a market with a discontinuous innovation that is starting its tornado.

-----

This is the last post in this LTBH series, realize that LTBH doesn't mean buy and forget, you should be looking at your holdings at least once a quarter to make sure that the reasons you originally bought them still applies. Stick with your discipline, whatever it may be and you should do well in the long run as long as you chose well your holdings.

Good luck with your investing journey.

-xerohype

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