When to Sell

High price or high P/E should not be the only criteria for selling.
If you recollect 1 year ago Sterlite, Mahindra , ABB were selling at
P/E of above 40. We decided to stay and the earnings have increased
to such an extent that the same companies are quoting at P/E of less
than 12 even though the prices have advanced since then. The only
stock I sold in last 4 years was Bharti tele at 45 booking 50% gain
and you know what happened next.

I have the following rules for selling overvalued holdings though I
do override them in case to case basis.

1. When the future prospects of the company do not guareentee that
the p/e would be reduced to a more sensible figure(< 15).
2. When the prices are quoting at more than 30 times highest ever
earning of the company.
3. When the company is loosing its conpititive position which was
responsible for premium over general market.
4. When the company management/pronmotors shows any signs of
dishonest behavior in reporting financial results, in transactions
(preferential allotment, low priced ESOPs).
5. When the general economic scenario warrents lower multiples. In
this category would come rising long term interest rates, increase in
general tax rates.
6. When the industry is about to go through disruptive changess like
opening of markets in case of protected monopoly companies, increase
in taxes, restrictive regulation in industries like
tobaccco,breweries.

In nutshell there are very few quantitaive criteria for selling and
its quite natural to make mistakes. However my guidelines in buying
and selling have a major difference.

In buying I'm conservative. That means I would rather miss an
opportunity for making gains if my analysis is either incomplete or
inconclusive.
In selling I'm optimistic. I would rather hold the stock and suffer a
fall if my analysis is either incomplete or inconclusive.

To sum up, I prefer inaction if action is not warrented by the facts
and analysis.

Posted: Nov 8, 2004
http://in.groups.yahoo.com/group/lawarrenbuffet/message/1043