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KIRK KAZANJIAN<br />
Stovall notes that during the 1990s, the biggest mistake investors<br />
have made is selling too early. “That’s certainly been my problem,”<br />
Stovall admits. “The market keeps hurdling one historical barrier after<br />
another, and that’s something you have to watch out for.” Stovall<br />
tries to keep from making this mistake by constantly referring to his<br />
sector analysis research and reviewing the historical price ranges for<br />
various industry groups. Once he learns that a stock he owns is trading<br />
at the high end of its historical range, he often decides to cut back<br />
on it or entirely eliminate his position. In other words, if he knows<br />
that historically auto stocks have traded within a PE range of 9 and<br />
13 times earnings, once General Motors sells for 14 times earnings,<br />
he may decide the stock is overpriced and thus a candidate for sale.<br />
In this case, it is the overall industry PE that drives his decision.<br />
Like everyone else we’ve met in this book, Stovall relies heavily<br />
on fundamental analysis, or good hard research, although he often<br />
pays attention to technical indicators as well. If a stock’s chart pattern<br />
begins to unravel, he’ll often unload his position, even if he believes<br />
the fundamentals are still in place.<br />
YACKTMAN’S THREE RULES OF SELLING<br />
According to Don Yacktman, it’s time to sell a stock when:<br />
1. The share price of a good <strong>com</strong>pany approaches its private market<br />
value (as defined in Rule 1 of this book).<br />
2. The fundamentals deteriorate.<br />
3. A better business is available for the same price or less.<br />
Sticking with these guidelines requires discipline and occasionally<br />
leads to disappointment. For instance, the market doesn’t know the<br />
number Yacktman has calculated for a <strong>com</strong>pany’s private market<br />
value. Therefore, even though one of his holdings might reach that<br />
magic number, its shares could still keep going up. This is something<br />
that happens frequently during bull markets. It’s what’s known as a<br />
stock’s “opportunity cost,” or the potential profits an investor loses<br />
from being on the sidelines in cash. Even though this premature selling<br />
can cause his performance to temporarily suffer, Yacktman insists he<br />
must stick with his discipline of getting rid of stocks that he deems<br />
to be overvalued.<br />
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