Bill Nygren: The Right Time To Sell A Stock

Johnny HopkinsBill NygrenLeave a Comment

In the latest Graham and Doddsville Newsletter there’s a great interview with Bill Nygren in which his discusses a number of topics including the reasons to sell a stock. Here’s an excerpt from the newsletter:

G&D: What is your approach to selling?

Nygren : I’ve always thought that the reason people have so much trouble with the sell decision is because they didn’t have a well-defined buy decision. If you really know why you decide to buy a stock and why you own it, then the absence of those reasons becomes the reason to sell. At Oakmark, we’re looking for three things when we buy a company.

First, we want a significant discount to current business value. Second, we want that business value to grow over time at a similar rate as the S&P 500, so growth in per share value plus dividend income must at least match what we expect from the market. And finally, we want a management team that’s aligned with us wanting to maximize long-term per share business value.

If we feel we’ve lost any one of those three items, we’ll sell the stock. In an ideal world, we buy something at 60% of value and it goes up to 95% of value. If we don’t think our value estimate has changed, it’s no longer cheap, so we sell it and we move on to another cheap stock. But you also have mistakes where you thought a business was going to be able to grow and as you’re tracking the results after you purchase it, you decided you were wrong with your original thesis.

That’s a reason to sell the stock. You originally thought management was acting in the shareholder interest trying to maximize long-term per share returns. Then you see them issue an undervalued stock for a full price acquisition.

You ask about it and they can’t explain it in terms that make sense to you. If you’ve lost confidence that management is trying to maximize long-term value, that’s a reason to sell the stock.

The danger is when people will buy a stock without having a really disciplined investment philosophy. Then they’re at sea when the stock goes up or down.

If you buy something at $50 and three months later it’s $30, that’s not what you signed up for so you sell it. Or if you buy it at $50 and it goes up to $70, then you’re excited because it’s going higher, and why would you sell something that is going up? It becomes a very difficult and very emotional decision if you don’t have a solid reason for owning that stock.

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