Bill Nygren: The Art of Smart Selling: When to Part Ways with Overvalued Stocks

Johnny HopkinsBill Nygren

During this interview with Millennial Investing, Bill Nygren emphasises the importance of regularly reassessing the intrinsic value of their long-term stock holdings, which often exceed their initial estimates. Their analysts continually update their business value estimates based on new information and aim to do this formally, at least quarterly. If a stock’s current price surpasses its estimated intrinsic value, they sell it, although they may hold on longer to reduce tax implications. Here’s an excerpt from the interview:

Nygren: Yeah, really important question because many of our long term holdings have risen way above what our initial estimate of intrinsic value was. So our analysts do maintenance work on every stock that’s in our portfolio, and update their best guess of business value based on any new information that comes out.

We want this process done formally, at least quarterly, but really it’s constant. That if a company, a similar company is acquired that might help us refine our estimate of what multiple is appropriate for the earnings.

If earnings come in a little better or worse than expected, we want to make sure we’re adjusting our long term estimates for any of those shortfalls or excesses that we believe are likely to be sustainable.

If an analyst lets… I’ll just make up numbers, stock’s at 60, the analyst thinks it’s worth 100, and if it got over 90, we’d sell it tomorrow. But a year from now, that hundred is probably 107, two years from now, 115, and by the time we’re out five or six years, it could be 50 percent higher than what our initial estimate of value was.

But once the stock reaches our estimate of fundamental value, it’s sold.

The only reason we might drag our feet would be to let a holding go long term, to… lower the tax bite, but we don’t become momentum investors just because something has worked out.

You can watch the entire discussion here:

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