# Knowing when to sell



## Klogg (2 April 2012)

Hi all,

I had a quick look through the forums and couldn't find much information on this topic, so I thought I'd start one in the hope that someone can offer me some insight.

I've been investing in shares for the last 6months and am currently up about 7% on my 30k (that's including gross dividends - I should really use net...). But the issue I'm facing is figuring out how to sell.

One stock in particular comes to mind - Breville Group (BRG). I did my research and bought them about a month ago @ $3.10, just before their half-yearly. They announced a huge profit increase and have been going bananas ever since, hitting $4.26 today... Needless to say that with dividends, I'm up about 30% on this one in a month.

My issue now is, I've only valued them at approximately $4.00 (prior to their profit increase of 45%), but can see a great growth story in the company.
While I believe they're overvalued at the current price, I've held the stock because:

- They have a potential for great growth (I'd estimate about 15% per year)
- They pay a good dividend (about 4% at current price)
- They have great management (2 members are also on the ORL board - another great company)

The question I have for anyone who is willing to help is - is there a factor that I haven't included in my consideration to hold the company?

Any advice on the topic is greatly appreciated.


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## tech/a (2 April 2012)

Klogg said:


> Hi all,
> 
> I had a quick look through the forums and couldn't find much information on this topic, so I thought I'd start one in the hope that someone can offer me some insight.
> 
> ...





Yes

Supply and demand.
But I'm a techie so will leave it at that.


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## So_Cynical (2 April 2012)

You need a plan Klogg.

A holistic wealth generation and management from your stock market activity's plan.


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## ROE (2 April 2012)

This is from Philip Fisher - Common Stock, Uncommon Profit book

1) The investor has made an error in his/her assessment of the company.

2) The company has deteriorated in some way and no longer meets Fisher's 15 points for purchasing a stock.

3) The investor finds a better company which promises higher long term results after factoring in capital gains.

I pretty much follow that principles...I held stocks that has done 6 baggers, 5 baggers
1 baggers, they all varies in gains, have not sold many.

The last stock I sold was FGE after a 3 baggers (bought at 1 sold at 4) and that was a mistake 

JIN 4 baggers in less than 12 months still haven't sold 1 share...

Selling has never been easy for me so I try to stick to that principles if I can...


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## burglar (2 April 2012)

Klogg said:


> Hi all,
> 
> I had a quick look through the forums and couldn't find much information on this topic,
> 
> ...




Hi Klogg, 
I vaguely recall a thread on the topic, try this one.

https://www.aussiestockforums.com/forums/showthread.php?t=21891&p=613666#post613666


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## Klogg (2 April 2012)

tech/a said:


> Yes
> 
> Supply and demand.
> But I'm a techie so will leave it at that.




If by that, you mean the number of orders, demand outstrips supply 2to1.

As for the other replies - my initial plan was to always go back to what I fundamentally believed were the reasons I bought the company,e.g. valuable, growth, asset-play, etc.

I'm still sticking with that plan... and I guess I'm doing the right thing. I think the 30% I'm seeing over the course of a month is really attractive to me is all.

And just as an FYI - I read over the relevant chapter in Peter Lynch's book, which is pretty much in-line with my initial thoughts.

Thanks again for the help


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## Klogg (2 April 2012)

burglar said:


> Hi Klogg,
> I vaguely recall a thread on the topic, try this one.
> 
> https://www.aussiestockforums.com/forums/showthread.php?t=21891&p=613666#post613666




...clearly I failed at searching.

Thanks burglar!


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## Garpal Gumnut (2 April 2012)

Klogg said:


> Hi all,
> 
> I had a quick look through the forums and couldn't find much information on this topic, so I thought I'd start one in the hope that someone can offer me some insight.
> 
> ...




My take on the market atm is to sell earlier than one normally would for a smaller profit.

The market is whipsawing to an incredible degree.

It is like a bride's nightie.

gg


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## Boggo (2 April 2012)

Interesting comment by Marcus Padley on Inside Business yesterday morning when he said that* this is not an investor's market, it's a trader's market* and will be that way for a while yet.

Valid comment I think when you look at the demise of some of the pillars of investment such as LEI, JBH etc etc.

It really confirms what I and many others on here believe, its a hit and run market.

All the fundamental theory in the world is not going to protect you from China and Europe, cold hard price action and the ability to go to cash without sentiment or emotion is all it takes.

Just my


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## mr. jeff (2 April 2012)

Garpal Gumnut said:


> My take on the market atm is to sell earlier than one normally would for a smaller profit.
> 
> The market is whipsawing to an incredible degree.
> 
> ...




GG I wholly agree - I have missed 20% profits in search of more and have now found that jumping as soon as there is a toppy bar is the best move at the moment. Good to hear it from someone else...and confirmed with a few weeks of solid gains. Been a while.


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## tinhat (2 April 2012)

It depends on your strategy and how much risk you want to carry. You can take risk off the table, selling your initial capital outlay (the stock now doesn't owe you any money) and leave your profits (the "free money") in the stock for the long run.

You can implement a trailing stop-loss that you update on a weekly basis. Examples are Alan Hulls ActVest trailing stop loss (I've forgotten the technical details but I have it built into a chart I use), the Guppy count-back method (more for traders than medium term investors - can use weekly chart), or Chandelier Exits (using average true range). You can use a moving average (say the 30 day MA).

You can dollar average down - take some money off the table (reduce exposure risk) over the next couple of months.


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## Klogg (3 April 2012)

tinhat said:


> It depends on your strategy and how much risk you want to carry. You can take risk off the table, selling your initial capital outlay (the stock now doesn't owe you any money) and leave your profits (the "free money") in the stock for the long run.
> 
> You can implement a trailing stop-loss that you update on a weekly basis. Examples are Alan Hulls ActVest trailing stop loss (I've forgotten the technical details but I have it built into a chart I use), the Guppy count-back method (more for traders than medium term investors - can use weekly chart), or Chandelier Exits (using average true range). You can use a moving average (say the 30 day MA).
> 
> You can dollar average down - take some money off the table (reduce exposure risk) over the next couple of months.




Some people are really going to take a shot at me for this, but after a while of consideration I went against a stop loss. 

My argument here is, if I believe a share price is a fair bit less than what I value the company at, it doesn't necessarily mean it won't go further down... and I can't tell how much further it will drop.
(Actually when it does drop, I usually top up with any spare cash)

As for the other selling methods, given I'm only using fundamental analysis in my decision to buy, shouldn't I use the same type of analysis to sell? Otherwise, I may be getting mixed signals...


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## Vixs (3 April 2012)

Klogg said:


> Some people are really going to take a shot at me for this, but after a while of consideration I went against a stop loss.
> 
> My argument here is, if I believe a share price is a fair bit less than what I value the company at, it doesn't necessarily mean it won't go further down... and I can't tell how much further it will drop.
> (Actually when it does drop, I usually top up with any spare cash)
> ...




I don't know why people would take a shot at you for that. It's your money and portfolio, not theirs.

I think the difference is that you are buying as an investment. You are going to be a long term holder presumably, until the company reaches your projected valuation. It makes no sense to get stopped out and lose your capital base when you are not concerned with short term moves. As long as you actively monitor the news, reports and don't miss the play if something happens that changes your fundamental analysis, I'm sure you'll be fine. Worst case scenario without a stop loss is that a game-changing development occurs (war or unrest in the company's area of operations, death of half the management in a plane crash, total unavailability of equipment used to carry out the company's works - you know, the unexpected catastrophies) and you are the last to find out. That is when you lose.

I personally would use a stop loss that is outside the range of 'normal' movements so that I didn't lose out due to volatility. Consider it a catastrophy-stop. 

Anyone looking at 'trading' not 'investing' is going to want to use a stop loss though - preservation of capital is key as they are likely not holding for the long term.


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## Knobby22 (3 April 2012)

Klogg said:


> As for the other selling methods, given I'm only using fundamental analysis in my decision to buy, shouldn't I use the same type of analysis to sell? Otherwise, I may be getting mixed signals...




But often you don't hear the bad news till too late.

I have learn't the hard way that you need to be prepared to take at least some profit off the table when price direction changes ESPECIALLY on quick price rises. You can buy back later at a lower price if your fundamentals are still correct. Selling is harder than buying imo.


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## pixel (3 April 2012)

Boggo said:


> Interesting comment by Marcus Padley on Inside Business yesterday morning when he said that* this is not an investor's market, it's a trader's market* and will be that way for a while yet.
> 
> Valid comment I think when you look at the demise of some of the pillars of investment such as LEI, JBH etc etc.
> 
> ...



 +100%
you invest when markets are trending (up: long; down: short)
you trade when they're range-bound, which they've been for the last couple of years


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## skc (3 April 2012)

tinhat said:


> You can take risk off the table, selling your initial capital outlay (the stock now doesn't owe you any money) and leave your profits (the "free money") in the stock for the long run.




Profits - be they open or closed profits - are not free money!

If I've been trading for 10 years and made $1m profit in total... it doesn't mean that I can just leave that in the market without the same care and attention one would normally heed. 



Klogg said:


> As for the other selling methods, given I'm only using fundamental analysis in my decision to buy, shouldn't I use the same type of analysis to sell? Otherwise, I may be getting mixed signals...




This is something I've always believed in, but you also need to acknowledge that fundamental analysis gives you a range of price targets (and a pretty big range). 
If your position has moved up into the lower of that range, there is no guarantee that it can go to the middle or upper range. Afterall, there's no real reason why the market must value a company using 13 or 15% return (or PE of 11 or 13), yet that's probably the limit of accuracy one can expect from fundamental analysis.

In that instance, protection of profit becomes more important and a price-based stop is not necessarily contradictory to your fundamental entry. Every now and then you will exit a position and price keeps moving forward - but you can only make decision based on what you know now rather than by hindsight. 

Of course, unless there is new fundamental information and your target range has moved up further you'd hold and wait for the price to catch up.


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## tech/a (3 April 2012)

> Profits - be they open or closed profits - are not free money!




I often hear people say that they are trading with or gambling with "Their money"
meaning someone elses like a pokie win is the Governments or hotels money.
Or a share profit is from all those other people who have just bought and pushed the price higher.

They divorce themselves from what is really *THEIR MONEY*
Make no mistake its yours!

This problem of exiting seems to be directed at those who are investing or trading in a discretionary manner.

If you decide to trade in a discretionary manner or indeed invest in a discretionary manner you need to understand what your edge is and how you maintain that edge.
You should *KNOW* the answer to this question.

*If you DONT YOUR GAMBLING*


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## Klogg (3 April 2012)

skc said:


> Of course, unless there is new fundamental information and your target range has moved up further you'd hold and wait for the price to catch up.




I did re-evaluate last night to see if my decision would have changed, and the only thing that could possibly sway me is the potential in the US retail market for the company.
Given this, the company is priced just over what I would consider a 'fair' price (whether that's accurate or not) and is therefore, worth keeping in my mind.

skc - As for using a stop-loss, how do you decide at what level to place it?

tech/a - couldn't agree more!


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## Julia (3 April 2012)

Vixs said:


> As long as you actively monitor the news, reports and don't miss the play if something happens that changes your fundamental analysis, I'm sure you'll be fine.



What about that unexpected profit warning on the open that can cause a rapid drop by 40 - 50%?   



Knobby22 said:


> But often you don't hear the bad news till too late.
> 
> I have learn't the hard way that you need to be prepared to take at least some profit off the table when price direction changes ESPECIALLY on quick price rises. You can buy back later at a lower price if your fundamentals are still correct. Selling is harder than buying imo.



+1.


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## skc (3 April 2012)

Klogg said:


> skc - As for using a stop-loss, how do you decide at what level to place it?




There is no hard and fast rule. Using BRG as an example which has gone a bit parabolic, $3.60 / $3.80 is a zone of support that should hold if everything's going good, but that also mean giving back a fair chunk of your profit (currently ~$1 per share). If you are not willing to risk so much open profit then you will need to have a higher stop.

It is not fool prove and sometimes you end up selling at a temporary low point only to see the share flies up afterwards. 

Given that BRG is driven by the profit results I doubt it will fall flat in an instant. When it reaches a temporary "consensus" price zone you will see congestion pattern.


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## Klogg (3 April 2012)

skc said:


> There is no hard and fast rule. Using BRG as an example which has gone a bit parabolic, $3.60 / $3.80 is a zone of support that should hold if everything's going good, but that also mean giving back a fair chunk of your profit (currently ~$1 per share). If you are not willing to risk so much open profit then you will need to have a higher stop.
> 
> It is not fool prove and sometimes you end up selling at a temporary low point only to see the share flies up afterwards.
> 
> Given that BRG is driven by the profit results I doubt it will fall flat in an instant. When it reaches a temporary "consensus" price zone you will see congestion pattern.




To be honest, if it hit $3.60 again, so long as fundamentals hadn't changed, I'd actually buy more!

I guess this is why I find stop-losses (and exiting in general) puzzling...


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## tech/a (3 April 2012)

Klogg said:


> To be honest, if it hit $3.60 again, so long as fundamentals hadn't changed, I'd actually buy more!
> 
> I guess this is why I find stop-losses (and exiting in general) puzzling...




So your strategy is that while in profit hold?

If your holding decreases in value 10/20/50% or more but your valuation remains above your buy price
You hold as well
In fact you could buy more?

If so this flies in the face of strategy 1

Clearly you have no strategy.
You have no idea what your expectancy is.

Have you EVER closed a trade.
If so why?


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## Klogg (3 April 2012)

tech/a said:


> So your strategy is that while in profit hold?
> 
> If your holding decreases in value 10/20/50% or more but your valuation remains above your buy price
> You hold as well
> ...




I've only ever closed 1 real trade and that was because my valuation was well below the share price. It was a quite obvious scenario then, when I bought at what I considered to be 20% undervalued, then went to about 30% overvalued.

My strategy is:
- to sell when I believe the company is overvalued
- to hold when it's fairly valued and I believe will grow
- to buy when a company is undervalued.

Right now (and the reason I made the thread), I'm questioning how much the company should be overvalued before I sell, and whether or not I should be using stop-losses... 

Basically, I'm gathering advice from others to define at what level I believe a company is overvalued too much for me to hold and how to form a decision based off this.


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## tech/a (3 April 2012)

Klogg said:


> I've only ever closed 1 real trade and that was because my valuation was well below the share price. It was a quite obvious scenario then, when I bought at what I considered to be 20% undervalued, then went to about 30% overvalued.
> 
> My strategy is this, I feel it's quite obvious that my strategy is:
> - to sell when I believe the company is overvalued
> ...




I find this interesting.
So if you under value a company no doubt many others will come to the same conclusion as yourself.
If you think it over valued surely the rest of the world will also know what you know.

That being the case (Correct me if wrong). Why dont you see stocks perfectly rising on your undervaluation and falling on your over valuation.
If it was that clear cut it would be simple for anyone with accounting knowledge to buy and sell PERFECTLY.---as we all know its not.

So at what point can you get in front of the crowd with both valuations as you need to be first to buy and first to sell.Otherwise sell offs will catch you napping---err calculating.

Would you agree that your calculation may well be vastly different to others??


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## Klogg (3 April 2012)

tech/a said:


> I find this interesting.
> So if you under value a company no doubt many others will come to the same conclusion as yourself.
> If you think it over valued surely the rest of the world will also know what you know.




The world may have the facts, but they may not have come to the same realisation just yet... or a majority of people are too scared to invest, as was the case late last year.



> That being the case (Correct me if wrong). Why dont you see stocks perfectly rising on your undervaluation and falling on your over valuation.
> 
> If it was that clear cut it would be simple for anyone with accounting knowledge to buy and sell PERFECTLY.---as we all know its not.




And I believe the reason for this is again, emotion. Be it fear, greed, or whatever other than fact that brings someone to buy or sell, it creates inefficiencies which allow for what I perceive to be the under/overvaluation of a company.



> So at what point can you get in front of the crowd with both valuations as you need to be first to buy and first to sell.Otherwise sell offs will catch you napping---err calculating.




If I'm still analysing a company and all of a sudden people start buying and send the price through the roof, I accept the fact that I missed this opportunity and go to the next one. Patience is all it takes to find another.



> Would you agree that your calculation may well be vastly different to others??




Without a doubt, valuations will vary. But as time goes on and I gain experience, my valuation process has been refined and will continue to be refined. To date though, it has served me relatively well... But ofcourse, I've found a few mistakes in my decisions (i.e. I believe I've overvalued two companies in my portfolio)

As for selling, it should be linked to my valuation the same way my buying is... I'm just not as confident as I have less experience on that side.


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## McLovin (3 April 2012)

Klogg said:


> The world may have the facts, but they may not have come to the same realisation just yet... or a majority of people are too scared to invest, as was the case late last year.




Joel Greenblatt is a great example of that point (there are many others). His Gotham Fund averaged 50%pa for 10 years with special situation investing. A lot of his best ideas were found on the front page of the WSJ


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## tech/a (3 April 2012)

> The world may have the facts, but they may not have come to the same realisation just yet... or a majority of people are too scared to invest, as was the case late last year.




So a valuation is an opinion not necesserily held by a consensus of opinion.
Infect you may well be the only one with such an opinion.

(1) How often are your opinions right.
(2) at what point do you determine your right?
(3) At what point do you determine your wrong?


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## odds-on (3 April 2012)

1) After 12 - 18 months
2) I have made a valuation mistake.
3) Better opportunity


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## Gringotts Bank (3 April 2012)

Klogg said:


> Hi all,
> 
> I had a quick look through the forums and couldn't find much information on this topic, so I thought I'd start one in the hope that someone can offer me some insight.
> 
> ...




Hi,

I like the idea of using the same criteria for exit as entry.

If you use Fib retracements for entry, use them also to time your exit.

If you use valuations (say earnings and sales figures), use the same criteria for exit (eg. sales fell 40%, and your exit criteria is >=-30%).

Try not to think up extra reasons to hold or sell _after the fact_.  Know before hand what your exit criteria are.l


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## tech/a (3 April 2012)

Gringotts Bank said:


> Hi,
> 
> I like the idea of using the same criteria for exit as entry.
> 
> ...




Have you tested this idea with quantifiable results or is it an hypothesis?
When you say you like the idea is it just an idea or have you figures that show consistent profit.

I ask as that which you've posted on other threads is totally un workable.


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## motorway (3 April 2012)

Consider buying when there are signs that participation is rewarding those who have chosen to participate.... More importantly that those participating are not continuing to be disadvantaged.

Consider selling when there are signs that participation is punishing those who have chosen to  participate ... consider this from the perspective of those most recent to have climbed aboard and from those who have chosen  to remain aboard.

Consider Buying and selling after you have identified these turning points.

A real understanding of Support and resistance and of trends.

consider a trend in order to persevere ( to live and grow ) Has to reward the majority of those who _intelligently_  wish to participate. ( just like anything else that lives and grows )

 This includes ==> Buyers , sellers and holders.

This will be seen in healthy market cycles
of trend <===> consolidation <===> trend

markets have memory , because people do.

Hence Opportunity COSTS ( esp if no one else agrees )

Flow and Structure--> Both need to be seen to be Healthy

Stops are a useful entry technique..
What is the problem with a few small losses if it ads up to a much  better entry ?

In terms of TIME AND PRICE

They are less useful (imo ) in managing a trade in profit

A more active approach should take precedence  ( better opportunities elsewhere ? )
and yes investors should consider to _some degree_ _their_ 12 mth tax allowance.


*Things go down till they go up*

SIMPLE ! 

*They go up till they go down 
*

_should be _ *SIMPLE !*


Always consider Opportunity Cost imo

Motorway


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## Gringotts Bank (3 April 2012)

No data tech, sorry!

If you enter a trade because of brilliant earnings estimates, it would make no sense to exit because of a trend line cross (when the earnings estimates are still brilliant).  That defeats the purpose of entering in the first place.


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## Klogg (3 April 2012)

Gringotts Bank said:


> Hi,
> 
> I like the idea of using the same criteria for exit as entry.
> 
> ...




I'd like to have a set of criteria that I can set for every situation, but there's no way you can account for that.

One company might have a write-down of an asset which reduces earnings by 40%, while the other just makes 20% less profit. With a hard and fast rule of earnings reduction >= 30%, the first would have been sold, the second wouldn't. Yet, (depending on the situation of course) it's more likely that you'd rather keep the former over the latter.

As for my valuations on entry, there's no strict formula that can be applied. A good part of my valuations come from aspects that cannot be quantified very easily, such as:
- The quality/experience of management
- The industry/sector the company is within
- Any macroeconomic factors that will very obviously hurt the company (e.g. High AUD and retail)
- Any director buying/selling

There's a plethora of other factors that cannot be simply inserted into a formula... and this is what makes knowing your exit criteria so difficult, other than the three main points I listed in my strategy.


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## nulla nulla (3 April 2012)

Every one has their own interpretation of indicators, volumes, strengths and weaknesses. I find it helps to have a sale target in mind before you buy and when it hits your target sell and lock in your profit. Don't lose sleep worrying over missed profits if it goes higher, there will be plenty of other opportunities.


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## Boggo (3 April 2012)

Klogg said:


> There's a plethora of other factors that cannot be simply inserted into a formula... and this is what makes knowing your exit criteria so difficult, other than the three main points I listed in my strategy.




And in about 5 years from now if you haven't thrown in the towel you will have gone full circle and be back at square one and using the reality of the daily and weekly price action as a barometer of where a stock is heading (and along with it your funds).

Based on the items you have listed above where would you currently be on LEI and JBH as two examples and describe why (*to yourself as well !*).

The hardest part of the exit is overcoming the fact that you may have been wrong, you see that mentality by reading between the lines of a large majority of posts on this and other sites.


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## Gringotts Bank (3 April 2012)

Klogg said:


> I'd like to have a set of criteria that I can set for every situation, but there's no way you can account for that.
> 
> One company might have a write-down of an asset which reduces earnings by 40%, while the other just makes 20% less profit. With a hard and fast rule of earnings reduction >= 30%, the first would have been sold, the second wouldn't. Yet, (depending on the situation of course) it's more likely that you'd rather keep the former over the latter.
> 
> ...




I see what you're saying but I reckon your un-quantifiables can be quantified.

--director buying selling - plenty of websites offer that info.  Just a matter of knowing whether it's important, which I don't think it is, but you may know better.

--sector - how about a 100 day ROC as %?  Use the relevant sector index.

--management quality:  Number of times announcements disappoint market in the last 5 years?  Lincoln indicators would prob do this for you.

--macro factors should be reflected in the companies financials, so you might need not consider them??


tech is suggesting that it's good to test this.  I think there may be some software that backtests on fundamental data, but I'd have to Google that.

What fundamentals to test? You couldn't go past:   http://www.thepatternsite.com/Fundamentals.html


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## Klogg (3 April 2012)

nulla nulla said:


> Every one has their own interpretation of indicators, volumes, strengths and weaknesses. I find it helps to have a sale target in mind before you buy and when it hits your target sell and lock in your profit. Don't lose sleep worrying over missed profits if it goes higher, there will be plenty of other opportunities.




But if fundamental circumstances change, does this mean I move my sale target?


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## burglar (3 April 2012)

Klogg said:


> But if fundamental circumstances change, does this mean I move my sale target?




"The answer lies in the soil"


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## Garpal Gumnut (3 April 2012)

mr. jeff said:


> GG I wholly agree - I have missed 20% profits in search of more and have now found that jumping as soon as there is a toppy bar is the best move at the moment. Good to hear it from someone else...and confirmed with a few weeks of solid gains. Been a while.




I must admit I am more conservative, logging 5-10% in gains waiting for the break to a wave 3 and on the downturn, after the toppy bar, taking the 5% profit, and then picking the stock up on the retracement to support. CSL and RIO being recent examples for me.

gg


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## Klogg (3 April 2012)

Boggo said:


> And in about 5 years from now if you haven't thrown in the towel you will have gone full circle and be back at square one and using the reality of the daily and weekly price action as a barometer of where a stock is heading (and along with it your funds).
> 
> Based on the items you have listed above where would you currently be on LEI and JBH as two examples and describe why (*to yourself as well !*).
> 
> The hardest part of the exit is overcoming the fact that you may have been wrong, you see that mentality by reading between the lines of a large majority of posts on this and other sites.




I don't know much about those two companies, but taking a look at JBH, if the Debt to Equity ratio sat consistently above 30%, which in this case it sits a fair bit above, except for 2010 (although I'd usually look at financial statements, I've used ComSec this time), I would immediately be questioning whether this is suitable for me.
Not because their interest won't be covered, but because with that sort of leveraging, a small decrease in EBIT results in substantially smaller profits than it would a company of little or no debt.

This is of-course in hindsight, but it's the only way I can answer your question.

That being said, if BRG, or any of the companies I partly own, were to take on substantial levels of debt without a VERY good reason (and none come to mind right now), I'd be selling.


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## Klogg (3 April 2012)

Gringotts Bank said:


> I see what you're saying but I reckon your un-quantifiables can be quantified.
> 
> --director buying selling - plenty of websites offer that info.  Just a matter of knowing whether it's important, which I don't think it is, but you may know better.
> 
> ...




My point wasn't how much emphasis to put on them, or which factors to use, but rather that they cannot be quantified. 
For example, if director sells 10% of his holdings in Company A, how much should that lower my valuation? 10, 20%? 50%?

And just as a side-note - why on earth would I use the 100day ROC index for the sector to tell me whether or not to buy or sell a company? That's like saying "I shouldn't buy Oroton Group [ORL], because as a whole they don't make money"... meanwhile, they're a great performer.
In reality, this gives me the biggest opportunity for a bargain.

P.S. I don't hold ORL - did my research too late IMO


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## Boggo (3 April 2012)

Klogg said:


> That being said, if BRG, or any of the companies I partly own, were to take on substantial levels of debt without a VERY good reason (and none come to mind right now), I'd be selling.




OK, in the case of BRG, any other reasons why and where (price) would you sell ?


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## Klogg (3 April 2012)

Boggo said:


> OK, in the case of BRG, any other reasons why and where (price) would you sell ?




Well, given the following factors:
- Huge increase in profits
- Onerous lease expense about to expire (one of the larger ones)
- Increasing market share in Asia and Nth America

My valuation has come in the range of $4.00-$4.20. I know it's a big range, but there's no way I can pinpoint an exact value.

That being said, the question I'm seeking to answer is how much above this valuation do I sell it at. Right now, the 30% (above the top-end) I used previously is seeming a bit high - but this is also why I raised the topic.
To answer your question, anything above the $4.85 would mean I sell. (Using an approximate 20% over-valuation). 

Of course, any information that helps me refine that estimate is very much appreciated (And thanks to all that have contributed so far!).


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## McLovin (3 April 2012)

Klogg said:


> I don't know much about those two companies, but taking a look at JBH, if the Debt to Equity ratio sat consistently above 30%, which in this case it sits a fair bit above, except for 2010 (although I'd usually look at financial statements, I've used ComSec this time), I would immediately be questioning whether this is suitable for me.
> Not because their interest won't be covered, but because with that sort of leveraging, a small decrease in EBIT results in substantially smaller profits than it would a company of little or no debt.




Forget about the D/E. Same store sales had been flat or falling for 18 months and margins were falling. This was, to be fair, matched by the broader industry but JBH's PE was priced for growth.

Aside from that, management had telegraphed the maximum number of stores they were going to open and they were about 75-80% done. The marginal return of the 200th store was going to be significantly less than the 10th store. Out at $20 they didn't look that great. Even at $10, there's too many things going on in the idustry and I'd pass.


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## Gringotts Bank (3 April 2012)

Klogg said:


> My point wasn't how much emphasis to put on them, or which factors to use, but rather that they cannot be quantified.
> For example, if director sells 10% of his holdings in Company A, how much should that lower my valuation? 10, 20%? 50%?
> 
> And just as a side-note - why on earth would I use the 100day ROC index for the sector to tell me whether or not to buy or sell a company? That's like saying "I shouldn't buy Oroton Group [ORL], because as a whole they don't make money"... meanwhile, they're a great performer.
> ...





To quantify something is to give it a figure, 10% is a figure.   You'd have to backtest it to know whether it's even worth considering.  If it is, then you weight it according to how much it affects performance.

First you have a concern about "what if the sector affects things?", and then you basically say that sector is of no interest.  Make up your frigging mind.

By the way, your ORL example is the perfect reason why FA is inferior to TA.  You're contradicting yourself.


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## Klogg (3 April 2012)

Gringotts Bank said:


> To quantify something is to give it a figure, 10% is a figure.   You'd have to backtest it to know whether it's even worth considering.  If it is, then you weight it according to how much it affects performance.
> 
> First you have a concern about "what if the sector affects things?", and then you basically say that sector is of no interest.  Make up your frigging mind.
> 
> By the way, your ORL example is the perfect reason why FA is inferior to TA.  You're contradicting yourself.




I know what you mean by that, but my point with macro-economic factors was more to know what is happening in the industry, rather than discounting all companies from that industry based on an index.
For example, I know that if a company gave a profit guidance at the start of year of +5%, but then the AUD appreciated 15%, logic tells me their profits will be less. How much less isn't that straight-forward, but I know it'll be less.
An index won't tell me this either.

And I'd love to be able to quantify director selling as -10%. Even if I back-tested this, I'd find that each circumstance warrants different a different value.

If things were as simple as formulating and back-testing, the Efficient Market Hypothesis would hold true.


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## Klogg (3 April 2012)

McLovin said:


> Forget about the D/E. Same store sales had been flat or falling for 18 months and margins were falling. This was, to be fair, matched by the broader industry but JBH's PE was priced for growth.
> 
> Aside from that, management had telegraphed the maximum number of stores they were going to open and they were about 75-80% done. The marginal return of the 200th store was going to be significantly less than the 10th store. Out at $20 they didn't look that great. Even at $10, there's too many things going on in the idustry and I'd pass.




D/E still plays a role here. But point taken, this is by far a greater indicator.


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## McLovin (3 April 2012)

Klogg said:


> D/E still plays a role here. But point taken, this is by far a greater indicator.




JBH doesn't have overly aggressive gearing. Their interest cover is about 9x, iirc.

It would take a lot for them to get into trouble with that amount debt.


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## Klogg (3 April 2012)

McLovin said:


> JBH doesn't have overly aggressive gearing. Their interest cover is about 9x, iirc.
> 
> It would take a lot for them to get into trouble with that amount debt.




Yeah, it's not the interest cover that's an issue. It's the effect on profits that any decrease in revenue causes.

For example (I'm sure you already understand this, I just doubt my ability in articulating my point), if company A and B have $100k EBIT, A has 1mil shares, B has 300k shares and 700k debt, then at 7% interest, their profit per share looks like:

Per share profit = (EBIT - Interest)/No. Shares

Company A 
= (100000 - 0)/1000000
= $0.10 per share

Company B
= (100000 - 49000)/300000
= $0.17 per share

If those sales halved:
Company A 
= (50000 - 0)/1000000
= $0.05 per share

Company B
= (50000 - 49000)/300000
= $0.003 per share

Now the set of numbers here don't really relate directly to JBH, but they illustrate the point I was failing to make, lol.

McLovin - may I ask what factors you look at when thinking about selling?


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## Boggo (3 April 2012)

Klogg said:


> I know what you mean by that, but my point with macro-economic factors was more to know what is happening in the industry, rather than discounting all companies from that industry based on an index.
> For example, I know that if a company gave a profit guidance at the start of year of +5%, but then the AUD appreciated 15%, logic tells me their profits will be less. How much less isn't that straight-forward, but I know it'll be less.
> An index won't tell me this either.
> 
> ...






McLovin said:


> JBH doesn't have overly aggressive gearing. Their interest cover is about 9x, iirc.
> 
> It would take a lot for them to get into trouble with that amount debt.






Klogg said:


> Yeah, it's not the interest cover that's an issue. It's the effect on profits that any decrease in revenue causes.
> 
> For example (I'm sure you already understand this, I just doubt my ability in articulating my point), if company A and B have $100k EBIT, A has 1mil shares, B has 300k shares and 700k debt, then at 7% interest, their profit per share looks like:
> 
> ...





So from what I have established so far, if you had bought JBH in early 2009 you would still be holding it because your complex reasons/factors say its ok ?

*Yes or No ?*


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## Klogg (3 April 2012)

Boggo said:


> So from what I have established so far, if you had bought JBH in early 2009 you would still be holding it because your complex reasons/factors say its ok ?
> 
> *Yes or No ?*




Like I said, the company holds too much debt for me to consider it. So I would never have bought into JBH to begin with.

And just as a side note, these aren't really complex reasons/factors. They're actually quite simple ideas and you can get a very good understanding of them in Security Analysis (by Benjamin Graham).


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## McLovin (3 April 2012)

Klogg said:


> Yeah, it's not the interest cover that's an issue. It's the effect on profits that any decrease in revenue causes.




But the interest cover is more effective at measuring operating leverage than a balance sheet ratio like DE. A company that can generate a higher RoE should be able to carry more debt relative to equity, because equity is relatively small.

Example:

Two companies with a million each in equity and both with 30% debt to equity. Both pay 5% interest.

Company A earns $400k EBIT. It's interest cover is 26x.

Company B earns $100k EBIT. It's interest cover is 6.6x.

Both have the exact same D/E. But equal beasts they are not!

That was the point I was making with JBH, it's high RoE means it can carry more debt relative to equity. There are of a course a myriad of other factors (industry, economic cycles, Mars invading etc) but it's hard to see a company with 9x interest cover having a liquidity event.




Klogg said:


> McLovin - may I ask what factors you look at when thinking about selling?




Keynes: When the facts change, I change my opinion. What do you do sir?

I re-evaluate a couple of times/year. IME, most times there are plenty of early warning signs to get out. Without outright fraud, decent companies don't go from fantastic to woeful overnight. At least that has been my experience.

I do use a PE model for some of the more short term stuff I do. I do also use it on longer term stuff but generally I do it in paralell with DCF.


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## Klogg (3 April 2012)

McLovin said:


> That was the point I was making with JBH, it's high RoE means it can carry more debt relative to equity. There are of a course a myriad of other factors (industry, economic cycles, Mars invading etc) but it's hard to see a company with 9x interest cover having a liquidity event.



Yeah, fair point. I can't see a company as fundamentally strong as that having any sort of liquidity event without taking over some sort of fairly large asset and needing the $$ to fund it.




> Keynes: When the facts change, I change my opinion. What do you do sir?
> 
> I re-evaluate a couple of times/year. IME, most times there are plenty of early warning signs to get out. Without outright fraud, decent companies don't go from fantastic to woeful overnight. At least that has been my experience.




Very interesting.

May I ask in regards to DCF, how much emphasis you place on this value? Do you use it in conjunction with something other than a PE model?

Thanks in advance.


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## craft (3 April 2012)

I have three company sell triggers

The first is the reverse of the buy reason.  The discounted cash flows that could reasonably be expected by holding the company forever are less than the current price.

The second is that if the business performs worse than the assumptions embedded in my valuations. I will never lower a valuation and continue to hold. 

The third is to free funds for other opportunities or indulgences. The closest to being sold according to rule one is selected.

And one system sell trigger based on my historic equity curve channel. A lot of FA is subjective –This one is for protection against myself.


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## Klogg (3 April 2012)

craft said:


> And one system sell trigger based on my historic equity curve channel. A lot of FA is subjective –This one is for protection against myself.




If you're willing to, could you please give a little more information on this? What is it in your historic equity curve channel that helps you make this decision?

Thanks!


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## craft (3 April 2012)

Klogg said:


> If you're willing to, could you please give a little more information on this? What is it in your historic equity curve channel that helps you make this decision?
> 
> Thanks!




A linear regression line of my historical equity curve with an envelope that touches the peak and trough.  I watch both marked to market equity value and ‘allocated’ equity value in this fashion. If I make a new historical low deviation from the Regression Line, I will be re-assessing my judgement from the sidelines.


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## McLovin (4 April 2012)

Klogg said:


> May I ask in regards to DCF, how much emphasis you place on this value?




Quite a bit, although I really like it these days because it lets me do scenario analysis. I tend to do most of my thinking with a pen, paper and calculator.

Sorry the answer is a bit vague, but I don't know, a lot of it is internalised and I'm not sure how to quantify it.


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## tinhat (4 April 2012)

Klogg gave us the example of his holding of BRG. So it might be useful for people to state what they would currently use as a stop-loss according to their system/s.

Here goes for me.

Current PE is 13.74
Industry PE is 11.51

Company has had strong EPS growth and forecast EPS growth for next 18 months is double digit. Oddly, revenue is not growing nor forecast to grow FY13. So I don't know what is driving EPS growth. I would have to look further into the company to find out more about the fundamentals driving EPS growth.

Industry is consumer discretionary. Company sells internationally. Will do well if consumer discretionary spending grows.

Consensus target price (Thompson Reuters) is $4.02 (six analysts).

You bought for $3.10
Price is $4.20
Capital gain $1.10 or 35%

Consensus forecast is for FY12 dividend of 21c and FY13 dividend of 23c. Let's assume 21c fully franked. Yield on your buy price, grossed up for franking credit is 9.7% If you are confident that yield will hold up or grow over the next couple of years then, for my SMSF which has one member in pension mode, that would qualify the stock for me as an income stock.

You will be picking up the interim dividend (ex div 9/3/12) of 12.5c. Assuming you will qualify for the franking credit, grossed up that is a return of 5.7%

So in terms of deciding whether to hold for long term capital growth plus income versus realise capital gains now. You're going to be forecasting a gross dividend yield of almost 10% per annum over the next couple of years by keeping your money at risk in the stock. Contrast this to the capital gain you are sitting on of 35% plus the grossed up dividend you will receive (assuming you are eligible to claim the franking credit) that total's about 40% return.

Looking at the technical indicators...

Weekly chart shows stock in Elliot wave five (third wave up) since GFC. Price has become parabolic on the most recent wave up on the weekly chart. Stochastic oscillator has been in over-bought since late February so time to keep an eye on the stock and tighten stop loss. Weekly MACD is at an all time high. In summary the stock has had a very strong run up since the end of Jan 12.

Guppy count-back stop loss is $4.02

I calculated a Chandelier Exit using a 50 day average true range of $4.018

Note that the lowest price yesterday was $4.14

If you were to sell at a stop loss of $4.00 that would represent a capital gain of 29%


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## Klogg (4 April 2012)

Craft - that is very interesting, haven't even considered something like that.

McLovin - thanks. This sort of approach would suit my style very well, and I'll be doing my research today into it. (I'm a pen and paper kind of person)

tinhat - From a fundamental point of view, that mirrors my thinking very well. From what I can tell, the reason for no increased revenue in FY13, yet higher EPS, is that there are a series of onerous leases set to expire at the end of this financial year, which are fairly sizable. I think they were to the tune of 5mil or so last financial year.
And I'd also agree that this is somewhat an income stock, as it's yield is one of the top reasons I'm holding it... (probably should have mentioned that earlier).

I will also look at the TA you've used and try to make my own way to those same conclusions. And thanks for using a specific example, that's helped a lot.


Also, I'd say that the objective of this thread has been met, as I have more than enough now to go away and start researching a few techniques that many have mentioned.

Thanks all!


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## Gringotts Bank (4 April 2012)

Bell Direct have a backtesting engine for FA, powered by Recognia.  I'd forgotten about that.

You can build your own strategies, but here's a pre-built one called GARP (Growth at Reasonable Price).   It uses about 7 different pre-defined FA criteria. 

    Dividend Growth Rate 5 Year Average
    Dividend Yield
    P/E (TTM)
    Price/Book Ratio
    EPS Growth (5-Year Historical)
    Revenue TTM
    Current Ratio

No idea what the sell criteria are.    If I was going to use it myself, that would be my first question.

So, it performed like this versus the Ords:


5 Year Return:  -20.5%	      -27%
3 year Return:  -20.5%     20.3%
1 year Return:  -16.9%    -10.8%
6 month return:  3.3%     6.8%


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## pixel (4 April 2012)

fwiw, I calculate my trailing stop measuring the volatility and accepting an average day (or two) going against me. If the trend is strong, I'm allowing a wider multiple.
For BRG, applying 1.5 days, I would exit on a Close Below $4.04.




In situations where candle analysis suggests a top reversal pattern, I am likely to override and take profit earlier. Monday's Shooting Star being followed by 2 red candles would most likely trigger such a discretionary early exit.


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