Anytime I engage in casual conversation about my deep value investing strategy, the follow-up questions are inevitable.
What’s your time frame? When do you sell?
In fact, after explaining value investing not too long ago, I actually had someone ask me of I used stop orders to control my losses. The answer to all these questions is simple.
I have never used a stop in my life and I do not have a predefined holding period for my value investing picks.
Instead, value investing means holding stocks until they work, and selling them when they have reached full valuation. I do not really care how long that process takes.
Value Investing Is Not About a Time Horizon
See, when I evaluate a potential value investing stock, I calculate the value of the corporation as an ongoing business over the average business cycle using current and historical earnings, cash flow and asset values. I also use recent transactions in private and public markets to come up with an estimate of the fair and full value of the stock.
The key to value investing is obvious: Buy at steep discounts from the value that I calculate — usually at less than tangible book value.
Which brings us to the answer of the “when to sell” question. In deep value investing, you start selling when the price reaches its fair value. I do not care how long it takes for my value investing to pay off any more than the owner of a business would care how long he operates his company before selling it at a fair price .
Sometimes successful value investing happens fast. Not long ago I bought a small community bank that within two weeks was the subject of a rather genius takeover offer from Huntington Bancshares (HBAN) that unlocked the full value of the shares.
I also bought Century Casinos (CNTY) earlier this year at a steep discount from book value. CNTY shot higher by some 70% in short order and I sold it at my estimate of fair value.
On the other side of the value investing coin, I still have stocks like Fly Leasing (FLY), Sunstone Hotels (SHO) and Cedar Realty (CDR) that I bought back in 2009 on the books. I doubt I will be selling them anytime soon.
The bottom line is that, for deep value investing, trying to set a specific time fram would just a silly task. I have no idea what the markets and economy will do in the years ahead or how long a business will take to be fully recognized by the stock market.
When it comes to value investing, setting a sell target based on time just makes no sense. That’s because you should be evaluating each stock’s underlying business and not just a betting on a quick blip.
So if you get the buy price side of the value investing equation correct, time will take care of the selling part for you.
As of this writing, Tim Melvin was long FLY, SHO and CDR.