This post is stand alone.
For those who have the time to read a century of comments to get the context and perspective, you may want to read this old post: Here’s a question to Value Investors.
When to buy
When do Value Investors buy?
They buy when they can find a stock that is selling below its “fair value”.
There are quite a few metrics to use, but fair to say these “fair value” metrics can be “calculated” from published quarterly or annual statements.
Teaching or learning these metrics is easy. There are formulas, excel file templates to fill-in, numbers to crunch.
All very black and white stuffs.
When to sell?
When the reason you bought was because there was a “discount” to fair value, then the logical “catalyst” to sell is when that “discount” is no longer present.
That’s what the pros do.
After the sale, they go hunting for other stocks that are selling below fair value.
Buy, sell, rinse, and repeat.
If they can’t find stocks selling below fair value, they don’t bite.
Retail Value Investor don’t have the same playbook
The competent ones do buy at discount to fair value.
But when the stock price has risen to fair value, that’s where retail value investors deviate from the pros…
Nope, can’t sell.
What if after selling the price goes higher?
Now these retail value investors have transition into Peter Lynch’s Growth at Reasonable Price (GARP).
And when the price has soars to more than 2 standard deviations from fair value, with P/E multiples that will make any true blue Value Investor puke, now the same retail value investor will morph into a Growth Investor like Philip Fisher.
See? I made a mistake with my “fair value” calculations. The stratospheric price today is the new “fair value”. So there’s lots of room for price to go much up before everything is overvalued!
Am I making it up as I go along?
No way! Look, I’m a LOOOOONG term investor OK?
When shit hits the fan
Its not so bad if one transitions into GARP or Growth Investing from a Value Investing mindset,
All of the above entry methods have their own exit strategies.
But if we morphed into a long term buy-and-hold strategy mid way, that’s similar to the joke traders use to mock themselves – letting a trade become a long term investment – you know it usually does not end well…