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28. When to sell stock like Warren Buffett

Jun 06, 2021
welcome to course 3 unit 1 lesson 1

when

to

sell

stock

s for many people

sell

ing

stock

s is a kind of mystery game for them it's almost like they are rolling the dice whether they should continue selling buy more buy some more and hopefully This lesson for the beginning Course 3 will help you easily determine whether you should sell stocks, buy stocks, or whatever, so let's get started and I'll walk you through the methodology. One of the things Buffett does very well is knowing

when

and if. he should always sell shares every time he buys his shares he always has the opinion that he plans to own them forever so his intention is never to buy something low and then sell it when it is high his intention is to buy it low and continue to hold it for the entire life of the business , but in some situations you need to sell the shares and usually it always revolves around two rules, so the first rule you have is that you will sell the shares if you can expect a higher return by trading. in another asset and when you make those transfers you take into account that you have to account for capital gains and something else that I would like to add is that not only do you account for capital gains that you are going to pay and then lose when you transfer assets, but you also It takes into account the level of risk when moving from one asset to another, so you'll want to find something that has a similar risk if you're looking for a comparable return after paying capital gains tax.
28 when to sell stock like warren buffett
So that may sound a little complicated and that's what this whole lesson really focuses on is determining that trade and whether it's worth the trade and then the second variable you use to determine whether you should sell something is whether the company has changed his fundamentals back in course 2, unit 3, we discussed his four rules for buying common stock and all those different principles, those tenants, if any of those tenants change after he's bought the shares, that's the only reason for him go ahead and sell the shares so let's say you bought a company that to manage its debt well and kept the debt-to-equity ratio below 0.5 and added a current ratio above 1.5 and things like that, let's say that within In two or three years the company no longer has those fundamentals, that is a very good reason to sell those shares regardless of what the trading price is because the fashion of that company has changed the way it operates and that is something that You might want to run away depending on which direction the change is going, so let's go ahead and focus on that first tenant, where we're basically going to figure out how to evaluate that change in value from one asset to another after accounting for the property tax.
28 when to sell stock like warren buffett

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28 when to sell stock like warren buffett...

Capital gains. I'm going to give you a scenario, this is just a generic scenario, it really has nothing to do with current market trends of how low it was in 2009 or anything like that, so don't read too much into it, just look. to the pure numbers because that's what I'm trying to get at here, so I'm going to present you with a scenario where there is a stock of a company and the symbol for that company is xxx, okay, the market. The price of company xxx is $50 per share and the book value of that company is $48 per share, which is very close to the market price and you've gone over all those different techniques that we learned in course 2, unit 3 to evaluate the expected value of the book. value growth and all that intrinsic value can be calculated, so I'm just showing you those key terms that you need to know to figure it out, so the expected book value growth of this company is based on the past. future performance and earnings and all that will be 7% per year now.
28 when to sell stock like warren buffett
I know I've told you in the past if you always want to buy a dividend company, but to make the calculation a little easier, I simply said that we are not going to deal with any company that is paying dividends, we are just going to assume that all Profits obtained by the company will be reincorporated into the capital of the company, which will be shown as book value, okay? and that's grown to 7% and this company's debt-to-equity ratio is right where we want it, point five or less, so it's on target there and our future earnings will be consistent with what we've seen over the last 10 years, so based on numbers, when we compare xxx, let's say the ten-year federal note right now is 3%, although that's not what it is, we're just going to say that for this generic scenario in the year 2009, which was three years.
28 when to sell stock like warren buffett
Ago, let's say interest rates were 3%, so how would we calculate the intrinsic value of that company at that time? Let's figure it out before we move on to the next scenario, so I'm going to check out Buffett's books. Intrinsic value calculator to make that calculation quick. Well, I have Buffett's ebooks.com website open and to go to the intrinsic value calculator, the first thing we're going to do is go here. and we mouse over the calculators tab, we'll go down to intrinsic values ​​and then to stocks, and it takes us directly to our intrinsic value calculator, which is all you have to do is scroll down and base it on the information that I gave you .
You really won't have to enter anything into the top calculator because I already gave you what the expected book value growth is going to be, so we can go down here to the bottom calculator and we can see that all the numbers that need are already there, so the cash that will be taken out of the business we said the dividend is zero, so we will put it there. Well, that's our expected dividend over the next ten years. The current book value is $48. Let's go ahead and put that in the average percentage change in book value per year, so this is the number seven percent that we have here.
Seven percent annual growth is what we think that $48 book value is going to be. will grow every year for the next ten years, so we're going to put seven in there, which means seven percent and then what we're going to discount is the 10-year federal note, so we're going to go for ten years and we're going to use a three percent federal bill and we're going to calculate the intrinsic value well and as you can see we have seventy dollars and 25 cents, so we're just going to round this up to let's say the intrinsic value of this company is seventy dollars per share.
If anything I just described doesn't make any sense to you, you'll probably want to go back to the course, unit three, lesson five. To really understand how that intrinsic value calculator works, after all those numbers through our intrinsic value calculator, we know company xxx that is trading on the market at $50 a share, we believe its value is worth $70 a share when we compare it. to a 10-year federal bond at 3 percent, so when we look at that, let's say we would go ahead and buy some shares of this company because it was at a decent price, it was trading at 50 and we think it's worth 70 when comparing it to the note Let's say we buy a thousand shares of company xxx and we buy those shares at $50 each, so this is a $50,000 investment we just made in this company.
Well, that's the company we own and what I'm going to do is now, I'm going to walk you through a sales scenario, let's listen, let's go ahead and travel back in time to three years later and see how our investment did. and if we want to continue to maintain it or maybe buy something else, okay, so we've owned company xxx for three years, okay, and time is moving in an unusual way for our company, it hasn't really worked out as we expected, according to all those numbers that we really thought X X X was strong. choose, but in the end it shows some really strange signals, so let's go ahead and analyze them, so the first thing we will naturally look at is the market price that went back three years ago every time we bought company xxx on the market.
The price was $50, but now we were very lucky and the company is actually trading on the market at $70 per share, so it was very lucky. I mean, that's where we predicted the price would be, but let's see if it's really worth $70 per share. Share just because it's listed there doesn't mean it's necessarily worth it, so when we go down and look at the book value of the company, which is three years later, we see that the book value is the same amount as it was three years later. above, which is a bit strange, especially since this company hasn't paid any dividends, so it's a bad sign that the book value hasn't really grown.
You would think that the market price would have trended with the book value, but it did. If we look at the expected book value growth right now, it's five percent, which is considerably lower than what we thought it was three years ago, since the dividend is still zero and if we look at the debt-to-equity figure we can see it's a lot higher than where it was it's 3.0 and that number is not good that number is pretty scary and to be honest we could go to that second tenant where this company has changed their fundamentals with the way they manage . he is dead and in reality we would probably ignore the company and sell the companies specifically for that reason alone.
Well now the last thing we are looking at is probably the most important factor of the mall and that is that the forecast of future profits is constantly decreasing, okay in the scenario above, when we bought this company three years before, those profits were consistent and constant with the previous 10 years and the forecasts for the future were to see kind of profits, but now the profits are actually declining and so between that and If the debt-to-equity ratio is a little bit higher, that would be a unique reason to sell this company, but to show you the math behind this, because it may not be as obvious with some of your selections, so I'm going to show you the math behind this so we can determine if we should sell the company and trade it for something else using a federal node of ten years or, in any case, it could be fine, when we look at the value of the company today, which is three years later. it's going to have a completely different value than what we had three years before and that's what we're going to find out what the intrinsic value calculator is again, so let's go ahead and fill in, let's find out what the intrinsic value of the company is today and When we look the ten-year federal note, let's say the ten-year federal note is now four point five percent, if you remember, before it was three percent, but now it's four and a half percent, so that will put a different intrinsic value . value of this company, especially because our market price is different on all those different variables.
Okay, let's go back to our intrinsic value calculator and figure out what this is worth with all the new variables. Well, here we are back to the intrinsic value calculator. again, it takes the same path we took before to get here, when we look at the cash that can be taken out of the business, it will still be 0 because it is not paying dividends now, when we look at the current book value, it is still the same because the book value , the company did not add any money to the book value. Now you may be wondering why the market price has increased by $70 and you know that many times some of these things don't even increase. makes some sense, like why the company increased in value when the book didn't grow and they didn't pay dividends.
I can explain that and a lot of the funds won't be able to explain it, but that's beside the point, sometimes these markets move in directions that you can't even make sense of in good conscience, but what you can do is value it, so that's it. what we're doing here, okay, so the book value is still 48, now the average percentage. change in the book right now we are evaluating that the book value will only grow 5% when before we said that the growth would be 7%, so that is a significant difference and we have to implement that change, so we are going to change that to five, okay, which is a symbol of 5%, we're still going to have the top of the calculator for the next ten years because then we're going to compare it to the ten-year federal bill now before the ten years.
The federal note was at 3%, but now it's four and a half percent, so that's going to change the value of our company, so we put 4.5 percent and just remember that the federal holding note is not more that a rule that is a measuring stick for a zero risk investment that you can put your money in and that's why you're comparing it to that 10 year federal note so let's go ahead and click on calculate and You will be able to see that the intrinsic value of this company has changed drastically from where we were three years before, so now the intrinsic value of this company is 50 dollars per share and in the market you can see that the market price is 70 dollars per share, so the intrinsic value is much lower than what the company really is. negotiate for well, that is not a good thing, that means that if we continue to maintain it we are going to lose money, so tomore money you may have to pay to the state, so these are all considerations that you really have to make as you are.
We are considering transferring an asset from one asset to another and we are paying all this money in federal and state taxes before we do the math on how much it will grow. Okay, but to keep things simple, we're just going to assume. that we pay federal taxes and that's it and that the rest of the money that is left we will see what happens if we put that money in the TTT company ok then the first thing we have to do and this is step three that will be returned with our new election, like this that we have to calculate how much we are going to earn once we take our 66 thousand dollars and buy the TTT company, in order to do that we go back to the intrinsic value of Buffett's books. calculator, okay, and what we're going to do is take the cash out of the business, no dividends will be paid, so it will be zero, the book value, by chance, is still $48, it will almost always be different from its previous value. pick, so it's just a pure coincidence when we look at the book average percentage change, this is a little bit different, the TTT of this company is a little bit higher, 6%, okay, the number of years will still be 10 and our 10-year federal note.
If you remember, it's still 4.5% currently, so let's go ahead and hit calculate. If you remember, this is how we calculated it. It came out earlier is 55 dollars, the current market price is $50, okay, so we have a change just like we did before for company xxx, we have to change this federal note to 10 years until the intrinsic value is equal to our market price of $50, then In order for this number to go down, we have to increase this number on our federal holding note. Okay, so let's go ahead and make it 5% and see what happens. Well, we're getting closer.
Changed the intrinsic value to $52. We want it. to be 50 we're not going to stop until it's equal to 50, so let's go ahead and try 50.5%. Well, when we put 5.5 percent here, we have the intrinsic value to equal the current market price of $50, so we know that if we're going to buy a company t-t-t-that we're going to get 5.5 percent, that's what we estimate, that we're going to get a 5.5 percent return at the current market price, is fine, so we answered that question for our step three. and now we know that if we buy the TTT company at the current market price, we will earn 5.5 percent annually for the next 10 years, that's what we asked them.
Well, the final step is to calculate how much it will cost. investment of sixty-six thousand dollars, if it grows 5.5 percent annually, then we go back to our basic formula and so you know how many shares we could buy, you will take your sixty-six thousand dollars divided. with your fifty dollars a share and you will be able to buy 1,320 shares of the new company and those shares will grow so that our current value is sixty-six thousand dollars, it will grow by 5.5 percent, so when we plug those numbers into the formula our future value is equal to one hundred twelve seven hundred thirty seven dollars and that would be the value ten years from now the year would be twenty two so let's go ahead and recap what happened here okay if we decided that if continue to hold company xxx based on all the new trends in the data that our future market value in ten years would be worth seventy seven thousand dollars and then we went and calculated after paying the capital gains that we made from company xxx and then we marketed it in the company t-t-t-that the future market value would grow to a hundred and twelve thousand dollars in that same period of time, so the smart decision here for the smart investor and the person who understands security analysis is that your decision to transfer the money and sell your shares of company xxx and trade them in company T TT is a thirty-five thousand dollar decision, so that concludes course three, unit one, lesson one, when you sell shares.
I hope the information was informative and I look forward to it. To see them in the next lesson.

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