If you invest the Rule #1 way, you have probably made some pretty incredible investments. While you have done your due diligence to pick wonderful companies that you can hold onto for years, if not decades, you’d be remiss not to re-evaluate your investments from time to time.
As time goes on, companies grow and change, and your life and values change too. These changes influence whether or not you should stay invested in a particular company or sell it.
Today I want to talk about why you should re-evaluate your investments, and when is the right time to do so.
How Long Should You Own A Stock
Warren Buffett says that the ideal investment is one that you can hold onto forever, growing your money for as long as you own it.
Rule #1 Investing is based on this long-term investing style. It focuses on buying wonderful businesses for well under what they are worth so you can allow your investment to build up over time and reap the benefits of compound interest.
However, Buffett and every other successful investor also know that there are times when you should re-evaluate your investments to determine whether or not each one is still a good investment for you.
Let’s take a look at a few indicators that signal when you should re-evaluate your investments and when to sell.
5 Signs You Should Re-Evaluate Your Investments
When you first decide what company to invest in, you build a story around that company. You fill the storybook pages with research on that company around its meaning, intrinsic value, management, and more.
When we see that there’s been a change in the story, we need to re-evaluate that investment. Not all changes to the story are bad; some will signal you to sell your investment for a great profit and some will signal you to buy more of that company’s stock.
Here are the signs to look out for:
1. There Is An Economic Downturn
No one can predict an economic downturn, or how it will affect different industries and products. A recession could really hurt some businesses while really benefiting others.
For example, the Coronavirus negatively impacted the entire travel industry but positively impacted the home fitness industry.
Regardless of whether the industries you invested in are shrinking or expanding, an economic downturn is definitely a time to re-evaluate your investments. It will expose the strengths or weaknesses of a company that you may have not known before.
During this time you can really discover what companies will sink or swim and sell or invest accordingly.
2. The Company is Under New Management
Evaluating a company’s management is a pivotal part of telling its story and essential for Rule #1 Investing, so it should be a given that if the management changes, it’s time to re-evaluate your investment.
New management can be a signal of underlying problems with the business such as poor money management or a serious scandal. However, it can also be a good thing.
Does the new CEO have a track record of success and integrity? If so, he or she may lead the company in a better direction.
If this signal leads to negative information, its likely time to sell, but if it leads to a positive shift in the story, it may be a good time to buy more of the company.
3. There Is A Shift in the Industry
Industry shifts often happen much more slowly than a big economic downturn or change in company management, so they can be easy to overlook.
However, some shifts can make products and companies completely obsolete, so its important to pay attention to what’s happening within its industry.
Is new technology rendering the company less competitive? Are new laws regulating how the company operates?
If so, it’s time to re-evaluate that investment and make sure you really understand how the business will be impacted by the shift.
4. The Company Price Has Reached Its Intrinsic Value
As Rule #1 investors, we purchase companies at a discounted rate, more than 50% below their real intrinsic value.
We do this because we have evaluated what we think the company is worth and want to ensure that we can get a great return on our investments. So, when the company has reached its intrinsic value, it is time to sell—and to do so gladly! If you did it right, you’ll make at least double your money.
If a company has reached its intrinsic value but is still experiencing high levels of growth, it may be worth hanging onto, but do so based on your own tolerance for risk or consider options trading.
5. You Experience A Change In Your Personal Life
Your personal life, values, and ambitions should always play a role in your investments.
Did you recently get laid off or do you have a kid nearing college? Are you thinking more about retirement or putting a down payment on a house? All of these circumstances can mean you need to re-evaluate your investments.
If you need a bit more cash, it could be the right time to sell some of your investments that are nearing their intrinsic value in order to put the money towards something else important in your life.
How to Evaluate Your Investments?
You should always invest for the long-term, but that doesn’t mean you ignore changes in the company or your own life.
When the story of the company changes, it’s time to re-evaluate your investments and decide whether or not the company’s new story is worth investing in.
Revert back to the Four Ms: Meaning, Moat, Management, and Margin of Safety to see if the company still makes a great investment or if its time to sell.
For more smart investing practices, check out my Smart Investing Cheat Sheet!
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.