In this interview with Value Investor Insight, Bill Nygren discussed the importance of discipline in selling investments when they reach around 90% of their estimated business value.
He questions why some value investors, who are methodical when buying, switch to a momentum-based approach when selling—waiting for the market to signal the right time.
Nygren argues that if investors worry about missing gains from a stock’s move from fair value to overvalued, they should instead focus on identifying undervalued stocks that can offer significant returns as they approach fair value.
Here’s an excerpt from the interview:
We generally sell at around 90 percent of our estimate of business value and we try to be quite disciplined about it.
I’ve never understood why value investors who are very disciplined on the buy side become momentum investors when they sell, saying they’ll wait for the market to tell them when it’s the right time to sell.
It seems to me that if you think your portfolio is being hurt by that last move from fair value to overvalued—that that move is greater than what you’d get by going from 60 percent of fair value to 90 percent of fair value in something else—then shouldn’t your strategy be to identify names that you’ve missed that have run up to fair value and buy them for the run to overvalued?
Yeah, it’s frustrating to sell names and they go up more, but the flip side is you’ve reinvested that money in something that you feel is more undervalued and should contribute to your returns beyond what you’ll get from what you sold early.
You can find the entire interview here:
Bill Nygren – Value Investors Insight (Subscription Only)
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