In short, the reason I don’t like value investing is that value investors spend all of their time talking about when to buy and not much time is spent discussing when to sell. I say this as someone that does value investing from time-to-time, ha. Value investors repeat things like buy and hold, or buy this stock for the dividends and cash flow. Another phrase they use is “margin of safety.” I’m still trying to figure out how there is a margin of safety that the rest of the market has completely overlooked.
I think value Investors often get the first half right, but the last half wrong.
Buying is easy, knowing when to sell is difficult.
I’m going to use Stanley Black & Decker as an example to get my point across about the dangers of a pure Value Investing mindset.
I’m including dividends (total return) in all calculations. I’m using SWK because many are recommending it as a buy; this is due to how much it has corrected. By the way, if a stock has gone down, that’s NOT a good reason to buy it. There could be a great reason it is down so much. Do you think you know something that the rest of the market doesn’t? Everyone knows when a PE value is below 15 or a price to book ratio is historically low. It’s not an advantage.
Stanley Black and Decker Previously Undervalued
If we go back in time to around January 2013, we see that SWK had a P/E ratio of 11.61. Let’s suppose you said this was undervalued and you bought at that moment (historically very low for the stock). Had you held the stock until today, your CAGR is 4.96% vs 13.53% CAGR for The Total Stock Market (Using ITOT as my reference). That’s over an 8% difference in CAGR (including dividends).
Talk about opportunity cost!
You can’t make the argument that you bought the stock for dividends or cash flow because SWK didn’t pay enough in dividends to warrant using it as an income stock. In fact, for many years the total market paid a higher dividend than SWK. You got walloped.
Holding SWK for nine years was a bad decision. In dollars, it would have turned 10K into 16K; whereas, a total market ETF like ITOT would have turned it into 33.7K. That’s a HUGE difference, especially if we are talking about your retirement and future. This is the kind of stuff value investors do not focus on enough. They make it seem like it’s easy to buy the right stock at a low price and then you’ll reap infinite rewards. That’s not how this works out. You have to time the entry right, but you have to time the exit right as well. Not every stock is Apple, which you hold a lifetime.
The question you’re left asking-could this have been prevented with fundamental analysis?
Let’s suppose you timed it perfectly and sold at the right moment, approximately December 2017. The PE value was 19.49 at that moment. Hooray! You got a CAGR of 20.6% vs. 15.9% CAGR for the Total Market. You beat the market by 6% compounded annually. That’s with perfect timing. Yet, most people don’t have perfect timing. What was the signal you used to know when to exit?
Let’s take that PE of 19.49 and use it to reevaluate. If we let PE be our signal to sell, the problem is the PE was over 22 in December of 2013. If we are going by PE values, then you should have sold it then as well.
Would a value investor have said the stock was overvalued? I don’t know, but probably not. Here’s the catch-Had you sold in Dec 2013, only holding the stock one year, you would have underperformed the total market by 6%. A high PE value isn’t helping you much with timing the exit or outperforming the market.
At what PE or price is a stock overvalued? How do you determine when to sell?
I think knowing when to buy is the easy part. Knowing when to sell is the most difficult part. This is why I think buy and hold is a bad strategy for many stocks (not all of them).
I have yet to hear a value investor tell me at which PE I should sell a stock or hold it accurately. If we assume buy and hold forever, we already know that doesn’t work out, at least with individual stocks. If it’s when PE=20, I just showed you how that can lead to underperformance. If it’s when PE=25, then you most likely held it too long with SWK.
An upcoming investor says, “I’m going to be like Buffett and buy a stock for a good price.” Online Value Investors feed people stocks to check out with this mentality. Yet, they hold the stock until the price corrects a large amount and now they are left holding the bag. I know, I’ve been there. It happened to me with AEO in 2018-2019. I was up 30% in the stock and then it turned around and I was down 20% in the stock because I bought into this lie of buy and hold.
SWK during March 2020 – My Value investing results
Here is another example (This example is myself. You can check my blog for when I was buying SWK during the pandemic crash).
I bought SWK from 3/16/20 to 3/20/20. I was literally buying some every day. The PE was slightly over 16.
My entry was almost impeccable, my exit was not. I sold SWK at a lot of different points. I sold a good bit on 10/23/20 when the PE was approx 26. The next batch I sold on 7/6/21 when the PE was around 18.7. I dumped the rest of it on 1/19/22-1/20/22 when the PE was 18. At this point, I realized SWK is toast and I needed to evacuate the building. Despite my impeccable entry, I held it too long. I did well but I underperformed the market! At the same time, had I not sold when I did, I’d been in a worse place.
I cannot tell you the exact things that went on in my head when i decided to sell, other than I saw my investment starting to slip. I’m sure the bit I sold in October was a profit taking precaution like I do with many investments after I’m up so much. I’m no fortune teller.
What if I hadn’t sold when I did? If I hadn’t sold, I’d be in the red on my investment today. Two years of investment that went nowhere. So much for buy and hold, and so much for value investing. Where were you guys when I needed you most? 😛
SWK Current Price and Valuation
Where am I going with this? Today we are here again. SWK is back at a PE of 15.81. That’s lower than when I first bought it. The dividend is 3.33%, higher than when i bought it in March 2020. People are coming out of the woodwork on YouTube saying to buy it, it’s “undervalued.” That it’s a great cash flow stock.
Maybe it is, maybe it isn’t. There’s probably a good reason it’s down so much. What’s different this time? Unlike March 2020, it’s a COMPANY thing and not a MACRO-economic thing. SWK is doing badly while other companies are doing great; it’s not universal.
Value investors are there to tell you when to buy it, but they aren’t there to tell you when to SELL it. Just keep that in mind. I bet the people that bought it in 2013 and held it for nine years never thought they’d only have a 4.3% CAGR to show for. Buying something at a great price is no indicator of how your investment will turn out. You have to time the entry and exit correctly.
Don’t get caught up in value investing = buy and hold or buying stocks for dividends and getting crushed 5-10 years down the road. Don’t be afraid to take profits, especially if these are in non-taxable accounts. Don’t be afraid to let a value investment roll by because you don’t see this margin of safety they claim is there.
I’m sorry, I cannot offer you any advice on when to sell either; I don’t claim too. I only know that evaluating stocks on a PE or Fundamental Analysis basis doesn’t lead to outperformance with individual stocks in the long-term. Mostly because it’s free knowledge than everyone has access to. I just know value investing can mislead people into holding investments too long.
Wishing you the best on your INVESTMENT JOURNEY