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RMPM, Part VII: My Individual Stock Portfolio -- The Sell Side Considerations

Contributed by mm | February 24, 2007 10:17 AM PST

Over time, I realize the art of selling is as crucial as the art of buying for a profitable investment experience. So, below is my current adaptation of how I will manage an acquired position over its lifecycle.

Maintenance of Intrinsic Value

My research process before acquiring a stock also generates an initial estimate of intrinsic value of the stock. Such initial estimate typically stems from quick calculation on free cash flow and book value and assigning a proper multiple.

Once I purchase a stock, I start keeping track of major corporate news, quarterly earning release, and research reports. At the very minimal, I revisit the fundamentals of a stock on a quarterly basis and adjust my intrinsic value estimate when necessary.

When Will I Sell?

Enough lessons in the past concluded that I have a bias in assigning the proper value of an investment -- I'm usually conservative than the average market, resulting in quite a few examples of seller's remorse.

Therefore, while I usually start to think about selling when stock price is approaching the intrinsic value in my mind, I also look for catalysts that will potentially bring stock price to the next level (such catalysts are easy to glean from analysts' reports). If there are no near-term catalysts, I usually sell a stock within 5% of intrinsic value. Otherwise, I tend to sell a portion of the holdings and wait for more developments.

Stop Loss of Doubling Up?

So what if a stock is heading south after my purchase? Typically I don't stop loss or double up automatically. Still, price deterioration will force me to look deeper into relevant information and determine if a stock's fundamentals have changed for the worse. I do take action accordingly based on my findings.

Average Holding Period

I don't have a target of average holding period to meet. Having said that, I typically hold positions for years -- the current positions in my portfolio has an average age of 18 months as of today. I do recognize more frequent trading will be detrimental to tax-adjusted return, and am glad my strategy allows for a low turnover.


Next, I will visit the mutual fund options in my 401(k) plan and decide my course of action to reengineer my 401(k) account.

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