When to cash out your share

According to Warren Buffett, the best holding period is forever. That is how he has made his great wealth, by picking the right companies and holding them for long, long period of time.

I have worked out a plan, to make myself financial free. I have a target to invest every month. Whether I invest in equity or debt i.e. my asset allocation depends Price / Equity of the Sensex
- Below 12 times 90% equity and 10% debt
- 12 – 15 times 80% equity and 20% debt
- 15 – 20 times 70% equity and 30% debt
- 20 – 25 times 60% equity and 40% debt
- above 25 times 50% equity and 50% debt

I tend to have a core portfolio – blue chip shares which I will never sell, and the rest of the portfolio – shares which will book out when certain parameters have been met.

With the core blue chip portfolio, every time the Annual Report appears, I study the same, and on the basis of the conditions mentioned in my earlier blog, determine at which price I would add to my stock. If that price is reached, I buy.

Reasons to sell:
1. When a stock that has been historically traded at between 10-25 times earning, begin trading at 40 or more times earnings, for no other reason than that the stock market is going through a period of mass speculation, its time to get out.

2. A good rule of thumb, is to add up the expected per share earnings of a company over the next 10 years and them compare the sum with what you would earn if you sold the stock and placed the proceeds in bonds instead.

3. Other reasons:
(a) A better opportunity presents itself.
(b) The business or environment changes.
(c) When the target price of the security has been met.
i. First target price – sell quarter the stock when the price goes up by 50%
ii. Second target price – sell another quarter of the stock when the price doubles. (the stock is almost free)