Having read my previous posts you’ve probably figured out that I’m a long-term value investor. However, sometimes you have to know when to sell even if you’re in it for the long term.
Knowing When to Sell a Stock – The Example of Western Digital (WDC)
Today we’re going to talk about Western Digital ($WDC). It’s been a quite pleasant trip I must say. I bought my 50 shares of $WDC in November 2012 at at $35 per share.
After 15 months I sold with a solid 132% return, compared to the S&P 500 which had only a 24% return during the same time period.
First, you need to see the opportunity when it arrives. In May of last year I posted another blog post on why I invested in Western Digital.
I also mentioned that there were more gains to be seen from $WDC. As a matter of fact, if you invested in $WDC, you would have made a 40% profit compared to S&P 500’s modest 7%.
So why sell now?
This is one of the hardest questions when it comes to investing. As recently as two weeks ago I held on to $AMD after seeing a 22% raise in a month; I believed in their earnings report so I didn’t sell it. Now I’m look at an unrealized loss (what I would lose if I sold it today) of 10%, the reasoning for that is a whole other blog post. In the case of $WDC, there are a lot of things which point at a stagnation of the price at this point. 24/7 Wall Street wrote a good article on why $WDC won’t continue on their former path of stock price growth.
It is hard to imagine that these could trade for 5-times earnings again, but a multiple of 8-times or 9-times earnings is not out of the question. Investors and traders could expect that if valuations are going to normalize further in a market sell-off or at least a breather, then Western Digital could have another $10 of potential downside and Seagate could still have another $5 or $6 downside.
2014 is a new year with new trends and the stagnation of $WDC opens up for other alternatives with higher potential return.
Knowing When to Sell, the Secret of Opportunity Cost
The secret to knowing when to sell is called opportunity cost. There are alternatives out there that give you a more preferable risk/return ratio. A few examples:
- Your current holding might hit some turbulent times and the risk increases. The opportunity cost here is risk and you might want to invest in something less risky (even if that means that you have to hold cash instead)
- You’re looking for good price yield but the upward trend of the price for the stock you’re currently holding is starting to diminish. Meanwhile there are other companies out there who might have similar risk characteristics but a better growth trajectory of the stock price. The opportunity cost in this case would be to miss out on better returns at the same risk.
- If you need your invested capital soon the opportunity cost would both be liquidity and risk.