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Creating a Portfolio Like Warren Buffett: A High-Return Investment Strategy by Jeeva Ramaswamy

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CHAPTER 27

Selling Strategy

Up to this point, we have discussed the strategies for buying securities, but selling is also a crucial part of successful investing. Selling takes discipline so that you can achieve maximum possible returns from your investments. As Warren Buffett often says, “My favorite timeframe for holding a stock is forever.” However, that does not mean that he will not sell the stocks in his portfolio. He used that statement in the context of forever holdings like Coca-Cola and American Express.

Here are the situations in which you should think about selling a position:

  • You should hold the stock until it reaches your calculated intrinsic value of the business. If the price movement of the stock is very good, you can hold the stock even after the stock price crosses your calculated intrinsic value. For example, imagine you calculated the intrinsic value of the company at around $20 per share and bought the stock for $10 per share. In a couple of years the price of the security reaches $20 per share. Growth companies keep growing every year. You can calculate the current intrinsic value of the company using the current owner income. If there is no fundamental improvement in the company commanding more than $20 per share intrinsic value, you can start selling the security at $20 per share and above. Suppose the company is in a growing mode and the company is increasing revenue and net income at around 20 percent annually; try to calculate the new intrinsic value ...

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