So, what if I told you there was a book out there that gave you the fundamental background of investing from Buffett/Graham yet answered the questions that haunts most value investors……..when to sell?
Value investing is wrongly associated with “buy and hold”. That is simply because its principle practishioner today, Berkshire’s (BRK.A) Warren Buffett has said repeatedly that his favorite holding period for a stock “is forever”. Now, while that may be true for some of his portfolio, Buffett does fairly regularly trade in and out of positions in the rest of it for various reasons. Personally, I think Buffett is doing investors a disservice making statements like that, but that is a post for another day.
Back to the book..
Vitaliy Katsenelson in 2007 wrote, “Active Value Investing”.
Here is the boiler plate stuff:
Katsenelson’s is straightforward enough to keep a rookie investor engaged, and in-depth enough to retain the interest of old pros, which makes this a great book for those of all skill levels. He does a comprehensive job of reviewing the market’s past, projecting its potential future, and developing a case for why value investing will shine as the market stagnates. He combines historical and financial analysis, along with engaging stories from his experience as a professional investment manager.–Chuck Saletta, Motley Fool
This book should be considered a practical compendium of modern finance, leaving no stones unturned on your way to better investments. Katsenelson’s passionate, witty and accessible writing expertly takes the reader through his original framework for valuing stocks in range-bound markets. A student of history and an overzealous stock picker, the author entertainingly illustrates every concept with a collection of real-world examples, demonstrating an impressive breadth and depth of understanding of what makes stocks move!–J.P. Tremblay, CFA
“How to adapt value investing for “range-bound” markets.” (Financial Times, Tues 26th February 2008)
“The new Benjamin Graham is Vitaliy N. Katsenelson. I highly recommend Katsenelson’s book, Active Value Investing: Making Money in Range-Bound Markets (Wiley, 2007). I like to think the old Ben Graham would have recommended it, too.”–Forbes
Why is this so different from every other value investing book? It dispels the myth that the best thing for an investor to do is “buy it and forget it”. While that works wonderfully in long bull markets, in a market that is range bound, it means your investment tends to make a round trip back to where it started.
This caught my interest. If we look at the S&P 500 for the last decade, today it sits 29% below where is started this time in 1999. During this time it peaked around 1500 in 2000 & 2007 and bottomed around 800 in 2002 and 2009. In other words, it has traded in a range for the last 10 years. The fact that Vitaliy in the book predicted this, while other authors were writing books about Dow 36000 or Dow 100 was not lost on me.
S&P 500 1999-2009
Vitaliy does not try to reinvent value investing. Of that, there is no need. Ben Graham did it just fine several decades ago. But, unlike others before him, Vitaliy dispels the notion (myth?) that value investing and selling stocks are somehow contradictory phrases. The typical value investing book is great at telling us when to buy a stock (they simply regurgitate Graham’s words), what to look for, how to value it etc, etc. What they do not do, and this is just as dangerous as not knowing how to buy is tell us when to sell.
There are few experienced more disheartening to a value investor than buying a stock, watching it climb and then watching it collapse because we have been told countless times the best holding period “is forever”. For some reason to value investors, selling is now synonymous with pornography. You don’t want to admit at a cocktail party you have engaged in either.
The “not selling” action and subsequent price collapse of the stock then causes the value investor to think their purchase decision was wrong. NO. The decision to purchase was 100% correct as the stock rose, it was the lack of a decision to sell that was the error.
Enter Vitaliy. Chapter 12 is the pertinent chapter. In it he lays out simply reasons to sell (buy the book for more detail).
1- The price has gone up and the stock is no longer a value
2- Fundamentals have deteriorated
Simple? Everything is in words, in practice is gets much harder. We value guys tend to fall in love with our best picks and that blinds us to current reality at times. We have all done it. For that reason Vitaliy says that we need to have pre-determined sell metrics in place and simply make the sell decision when they are hit.
If we truly love the stock and it becomes over-priced (which means you made a great buying decision, by the way), sell it and wait for it to become a value again. Then you will have captured your deserved profit and either by additional shares next time, or have funds to invest other places.
The perfect example? Buffett and Coke (KO). Buffet bought shares of Coke (avg. price $5) and watched it explode to $86 in 1998 at which it traded for an astounding 87 times 1999’s earnings. Not buy any measure was this any longer a value, it was buy all measures grossly over-valued. Buffett did not sell. Over the next decade the earnings have risen to $2.50 a share while the stock price has collapsed to today’s $49. I also want to note that less than 3 months after shares hit $86 in 1998, they collapsed to $62 and never again approached $80. In fact, Coke shares have traded between $40 and $60, in a range the past decade like the overall market. Buffett has publicly alluded to that fact he should have sold Coke shares in 1998-99.
For Buffett and Berkshire shareholders, the “no sell” decision cost them  roughly $5 to $7 billion dollars (200 million shares and about $25-$35 a share in lost appreciation).
Buy low and selling high is always a successful strategy, if you actually do it. Vitaliy finally lets value investor not feel dirty for doing what they should do… “sell high”.
Here is the book for purchase, it is worth every penny and more: