There’s no Science or a Right Answer

When they asked Warren Buffett when is the best time to take profits, he said he’s never been able to figure that one out. If the greatest capital allocator to ever live hasn’t cracked that code, no one will.

Maybe an A.I. will be fed enough data to compute a system, but, meanwhile, here are my rules of thumb:

  1. The business is deteriorating, while the industry isn’t and the competitors are earning market share.

If that’s the case, the business you own is lagging the industry and the peers.

What investors do, on occasion, is pair-trade, which is simply buying the two most dominant players in an industry (Visa and Mastercard, for instance) and that way they bet on the industry, not on the company.

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    If one owns a business that isn’t keeping pace with its peers and the plan to change it seems irrational, not doable or too complex for the current management, it’s time to re-think it.

    1. The business is priced in a way that projects too much growth into the future.

    This is classic and happens all the time.

    The S&P 500 would trade for 22 times earnings, but a stock you own that grows in par with the index, is selling for 60 times earnings.

    Time to consider trimming or cashing out.

    If the company has no earnings, then look at price-to-sales ratios.

    1. This one is very appropriate for 2023 and it is called: relative equity risk.

    If the entire universe of assets has changed, because of rising interest rates and one can earn 10%-12% interest on loans, backed by real estate, it’s time to rethink some of the companies in the portfolio, if they can’t match that for the risk taken.

    Whatever you end up doing, be methodical, not emotional.

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