When to sell

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4. When to take profits as a value investor

Asset plays

The safest time to sell an asset play is when its capitalization has returned to the same level as its asset value. More ambitious investors can wait for it to rise to the average for companies of similar quality in the same sector. (You can get this from a full-service broker, if you have one, or find it in Company REFS.)

Takeovers

Asset plays quite often become targets for takeover bids or management buyouts. As a shareholder, you should first consider whether the deal is likely to go through. If you conclude it is not, you should sell in the market before talks are called off and the price slips back again.

If you believe the bid may well succeed, but the price is too low, hold out for better terms. Do not respond to the first offer you receive from the buyer. Often, another buyer will come along and bid up the price. Unless you need the cash quickly, it is worth waiting to sell to the highest bidder, since it will save you paying commission and the bid-offer spread.

Turnarounds

A turnaround or recovery play is a company with temporarily depressed earnings. According to Peter Lynch in One Up on Wall Street:

"The best time to sell a turnaround is after it's turned around. All the troubles are over and everybody knows it."

Here are some key signs that recovery is complete:

• The P/E ratio and dividend yield have returned to the sector average
• The media praise the management for having rescued the company
• After a period of paying off debt, the company starts to take on more

As a general rule, for maximum gains you should sell turnarounds within 2-4 years of purchase. This usually approximates the "up" phase of the business cycle.

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