There is often an incorrect perception that value-oriented investors are simply long-term buy-and-hold investors. That may be the case for many self-described value investors, but I have a different viewpoint. My strategy is actually simple: When my target price is met, I sell. Sometimes that target price is reached in a few months -- and, if so, I sell. Other times, the target price is reached over a period of years -- in which case, I am happy to wait it out, provided I have no better use for the capital.
One of the biggest traps for some investors is falling in love with a stock. Love, whether it regards a stock or anything else, creates a universal problem: It clouds your judgment. Though I am not a trader, I do admire these folks for their ability to treat stocks indifferently.
To a trader, a stock is nothing but a ticker with a moving price that they hope to buy at one price and sell at another price. Traders don't hesitate to take a profit when a stock reaches their price target, and they are quick to dispose of a stock if the price declines beyond a certain point. Granted, traders are often buying and selling based on technical indicators, and that is why I take the hybrid approach: I invest like a businessman but sometimes think like a trader.
In very similar fashion to a trader, if I buy shares of a business and that business reaches my intrinsic value target, I will sell, regardless of time frame. Indeed, that was the case with several small-cap names back in 2009 and 2010. ATP Oil and Gas (ATPG) shares, for instance, went from $5 to more than $12 in less than a year. Late last year, Builders FirstSource (BLDR), I name I wrote about here when it traded for less than $2, climbed to more than $5 in less than five months. After such rapid surges, it was time for investors to take money off the table.
But, unlike a trader, if I buy shares of a business and the stock continues to decline, and my assessment of intrinsic value remains intact, I buy more. That was the case with Bank of America (BAC) when it fell into the low $6 area. I would also take a very close look at Chipotle (CMG) below $250 or somewhere around a price-to-earnings multiple of 20x to 24x. In my "businessman" role, I believe every business has a price at which it is worth owning -- and if you are confident in your analysis, then you should be willing to own even more when the price heads lower.
Also on my watch list is Advance Auto Parts (AAP). I began acquiring the stock at an average cost of around $53 to $55 a share, then sold in the low-$80 area because I had better use for the capital. Yet I'm a big fan of the company, and the approach taken by CEO Darren Jackson. The stock is now trading around $70, and I believe will it will breach $100 over the next couple of years, but I hope to own it again in the low $60s.
Maintaining discipline is an indispensable part of investing, but anchoring on a rigid investment approach can be equally dangerous. By maintaining discipline, along with a flexible approach, you keep the door open to a greater opportunity set.