When to sell

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5. When to take losses as a value investor

Because they are dealing in companies with problems, value investors often buy too early, when the shares have further to fall. Or they spend too long waiting in vain for a takeover or other event to trigger a realisation of a company's underlying value.

It is therefore advisable for anyone following this strategy to set a time limit on lossmakers. As a guide, Ben Graham suggested selling either

• after a price rise of 50%, once the market capitalization matched the net asset value, or
• at the end of 2 years

- whichever comes first.

Sticking to a similar "stoptime" will automatically take you out of bad investments. Less than one year may not be enough time for management to turn a company around. Allowing more than two years may cut your average annual returns to unacceptably low levels.

In the meantime, do not sell merely because the price has dropped. The market often drives the price of unloved stocks absurdly low before recovery begins. You need not worry, provided you have ensured before purchase that your chosen company has sufficient cash to survive the downturn.

1. When should you sell? 2. What is your overall strategy? 3. Selling for passive investors 4. When to take profits as a value investor 5. When to take losses as a value investor 6. Selling for growth investors 7. Mechanical formulas for selling 8. Selling in order to reinvest 9. Stoplosses 10. The argument over stoplosses 11. Limitations of stoplosses 12. Profit warnings 13. Selling for traders 14. William O'Neil's trading system 15. The most important rule of all 16. Emotional problems 17. Conclusion

• Beyond the Zulu Principle