stock will ensure that it will automatically be sold if it falls below the specific price you designate.
SELLING LIKE A PRO
Franklin Morton, senior vice president of portfolio management at Ariel Capital Management, says another value of having a sell strategy is that it can help keep investors from “falling in love with their holdings.” “In 1999, during the market bulge, the value of Yahoo! equaled the value of every stock in the Ariel Appreciation Fund combined,” says Morton. “Some stocks could stay overvalued like that for a while as Yahoo! did, but in the long run, the laws of economics will win [and the stock will decline in value].” (Yahoo! is not an Ariel holding; some holdings in the Ariel Appreciation Fund are McCormick, Carnival, and Clorox.)
As part of Ariel’s buy process, it establishes a private market value (PMV) for each stock, which is updated at least quarterly. When the stock reaches its PMV, Ariel’s sell discipline requires that it sell the stock.
Morton says there are four criteria Ariel uses to decide when to sell a stock in one of its mutual funds:
- When a company reaches full valuation. Ariel reviews and reevaluates a company’s value each quarter.
- When there is a change in the competitive landscape. “Not a short-term issue, but a real change,” says Morton.
- When there is a substantial change in company fundamentals. “Not just a bad quarter, but when the company loses the ability to generate new products.”
- When faith in the management is lost. “Whenever there is a change in management, we have to do research on the new person to make sure they are the right person for the job.”
By combining the systematic approaches used by Morton with some of the measures Basden uses, which are based on her personal risk tolerance, all investors should be able to begin crafting a sell strategy that
makes sense for them.
SIGNS TO WATCH
Deciding when to sell should be viewed as part of the discipline you exercise as a proactive investor. You should understand that you are not “married” to a stock (till death do you part), nor are you in for quick buying and selling to make a fast buck. Watch companies for the following signs, then research them carefully before you pull the trigger:
THE SECTOR IS EXPERIENCING HARD TIMES
If you own a company in a sector that is going through a downturn or major restructuring, you want to make sure the company you own stock in will be able to weather the storm.
THE CAPABILITIES OF MANAGEMENT ARE UNCERTAIN
The strength of the company will rely considerably on the vision of the team at the helm. Pay close attention to a weakening internal structure or any changes to the current management.
FUNDAMENTALS CHANGE SIGNIFICANTLY
Revenues and earnings -both past and forecasted results -are key to understanding a company’s future prospects. It’s important to explore not only the change, but the potential reasons behind it. (For example, if a company restates it earnings, you want to understand why its estimates were so far off.)