Question about Value Investing

[bisimpson]

Quick question for value investors (such as Buffett). Simply (or oversimply) put, I understand that you're looking to invest in a company that is undervalued. I understand that the philosophy is generally a "buy and hold" approach, similar to the index investing, right?

My question is: at what point do you sell an investment? Or are you looking for those companies that never run aground?

Thanks in advance. And yes, I'm a firm believer in index investing. I'm trying to understand a different approach, so bonus points if you point me towards something to read.

[Buffaloski Boris]

I’m not a believer in indexes. They’re a tool. Sometimes a very good one. Sometimes not.

Value investors are looking for stocks or companies or sectors that they/ we believe are undervalued by the market. Generally speaking most value investors are looking to buy and hold. Some aren’t. They’re looking for short term profits. That’s not to my taste, but if they can make it work, then good for them.

Warren Buffett is famous for buying and holding high quality companies. His company has sold some stocks in the past and probably will in the future. At one point he got out of the stock market completely and stayed out for a few years. I don’t recall reading anything about how he decides to sell a specific stock. I’m sure it’s out there, I just haven’t run across it.

I can give you my own answer which is intentionally fuzzy: I sell an investment when it makes sense to me to do so. I generally buy and hold, but I don’t buy and hold forever, no matter what.

[shinn497]

You dont need to value invest with individual stocks. You can overweight to small cap value indicies and then invest as you normally would.

[vand]

Most industries are cyclical, and many value-plays come from buying companies at the bottom of this natural cycle.

A good time to buy is when you believe you are at the bottom of the cyle, and the time to sell is when you believe you are approaching the top of the cycle.

For example, commodities are notoriously cyclical. Extracting natural resources out of the ground requires huge captial expenditure and a considerable lag from implementation to production, and most projects only get going well towards the latter part of the bull market when prices have already gone up sufficiently to make these projects viable, but sows the seeds in creating the excess supply that causes prices to eventually peak. As prices then begin to fall lower and lower you can't just easily shut down an oil rig because of the huge sunk costs, so everyone clings on for longer and longer hoping outlast their competitors or the price to recover, and the continual overproduction eventually causes the price to fall through the floor. Many companies then go broke and production contracts, so creating the shortages in supply that cause prices to recover and drive the recovery, and the cycle repeats.