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Subject:  Re: Chap 8 - Price Date:  1/23/2001  8:32 AM
Author:  ZenvestorB Number:  114 of 441

"In doing so, I am trying to apply Graham and Dodd in reverse, in other words set sell limits which, based on a mix of fundamentals and technicals, will diminish the likelihood of selling out too cheaply in the short run. Its not a positive margin of safety, because they might never get there, and I don't want to wait that long."

Hi John J.,

It sounds like your selling methodology is very reasonable, but it does seem that the question of when to sell is a much more difficult one to come to grips with than the when to buy question.

My take on Ben Graham's view is that he seems to imply that in an enterprising situation, where one has bought at a significant discount to fair value, it would be reasonable to recognize the profit at fair value and look for other enterprising opportunities. On a more defensive situation, where one has bought a solid, stable or growing company at a good price, he seems to indicate that there is no need to sell unless the companies longer term fundamentals reduce fair value below the current market or if the general market seems to have driven prices to unsustainable highs.

It is tricky, however, to pin down Graham's exact selling criteria. Unlike some other investment authors, he doesn't make it easy by having a chapter called "When to Sell".

A couple of other books that do have "When to Sell" chapters and that I've found helpful and that seem to also align with Graham's view somewhat are Peter Lynch's "One Up on Wall Street" and Philip Fisher's "Common Stocks and Uncommon Profits". These two books seem to expand on Graham's hints at selling. I especially think that Lynch's view on selling comes in handy.

For me personally, it seems that while investing is both art and science. Buying an investment is maybe 60% science, 40% art and selling seems to be more like 20% science and 80% art. Hopefully, if I buy the right companies at the right prices, I can mangle the sale a bit and still come out OK overall.

An example for me was my holding in DTG, I initially purchased some at around $19, estimating a fair value in the high $20's. Being a little more enthused at the companies good performance at the time than I should have, a more conservative analysis brought down my estimated value to the low to mid $20's. Without significant conviction in a valuation that gave a decent margin of safety or a conviction that company growth could be significantly sustained, I was quite willing to sell at a neglible gain, loss or breakeven and look for a better situation. Could the stock price go to $25? Probably. Could the stock price go to $30? Possibly. But I feel quite happy, given my initial overvaluation and decent but not good buy price, to get out of that position and pass up any speculative (in my view) profits that may occur.


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