Benjamin Graham's Notes on Selling For Value Investors

Warren Buffett's mentor gave detailed instructions in his books on when to sell a stock, none of which include the rumored "50-100% gains or after 2-3 years".

The Possible Misquote

Benjamin Graham — Warren Buffett's mentor — is sometimes said to have made a reference to "sell at 50-100% gains or after 2-3 years" in one of his interviews.

But the interview is not verifiable in print, and claims to be from an indirect source; all of which indicate that this might just be another example of a Value Investing misquote.

Graham In Print

GrahamValue recommends following Graham's printed material. Given below are Graham's notes on selling, from his books and printed lectures.

Attitude Towards Fluctuations

"Buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies."

Benjamin Graham, Chapter 8: The Investor and Market Fluctuations, The Intelligent Investor.

The Right Time To Sell

"Even defensive portfolios should be changed from time to time, especially if the securities purchased have an apparently excessive advance and can be replaced by issues much more reasonably priced"

Benjamin Graham, Chapter 14: Stock Selection for the Defensive Investor, The Intelligent Investor.

"The only principle of timing that has ever worked well consistently is to buy common stocks at such times as they are cheap by analysis, and to sell them at such times as they are dear, or at least no longer cheap, by analysis."

Mind The Spread

Graham also gave the following important addendum about considering peripheral costs.

"The intelligent investor must carefully evaluate the costs of trading and taxes before attempting to take advantage of any price discrepancy—and should never count on being able to sell for the exact price currently quoted in the market."

Benjamin Graham, Chapter 12: Things to Consider About Per-Share Earnings, The Intelligent Investor.

Summary

There are numerous such references and the underlying principle in all of them is consistent.

The investor is to run the numbers for his portfolio once a year or so, and readjust the portfolio as required. Stocks that no longer clear the Graham framework — either due to price appreciation or value deterioration — are to be sold. They may be replaced with new stocks that clear the Graham framework.

If the Graham figures had been run rigorously earlier, replacement due to value deterioration should be unlikely. Graham's Margin of Safety requirements are very thorough. That's why it's so difficult to find stocks that meet them in the first place.

"Presumably our defensive investor should obtain—at least once a year—the same kind of advice regarding changes in his portfolio as he sought when his funds were first committed... Incidentally, if his list has been competently selected in the first instance, there should be no need for frequent or numerous changes."

Benjamin Graham, Chapter 5: The Defensive Investor and Common Stocks, The Intelligent Investor.

On Recessions

"The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage."

Benjamin Graham, Chapter 8: The Investor and Market Fluctuations, The Intelligent Investor.

John Templeton

Sir John Templeton, creator of the world's largest international investment funds — and student of Graham — writes:

"The time to sell is before the crash, not after... If you can’t find more attractive stocks, hold on to what you have."

Peter Lynch

"You've got to look in the mirror every day and say: What am I going to do if the market goes down 10%? What do I do if it goes down 20%? Am I going to sell? Am I going to get out? If that's your answer, you should consider reducing your stock holdings today."

Warren Buffett

Warren Buffett too explained Graham's idea above (but in the context of buying stocks), in his baseball analogy of no called strikes. Buffett also says that some people are just not psychologically fit to own stocks, and that "selling a stock just because it goes down is dumb".

Six Years

Sir John Templeton, creator of the world's largest international investment funds — and student of Graham — explains why they have an average holding period of six years.