As a value investor , when do you sell?

It isn’t exactly that per se but you can also look at it differently. The total return you can expect from your stock investment is from three components. This is from Value Investing and Beyond by Bruce Greenwald. He talks it through in Value investing lecture Bruce Greenwald briefly. I have adapted some stuff to this as well. Accordingly, the Total return you can expect from your stock is the sum of:

• Shareholder’s Yield – (Cash used to pay dividend + Cash used for Buybacks)/ Market Cap
• Growth in Earnings – Historical EPS growth/ FCF growth or ROCE * (1- Dividends)/ Total Earnings
• PE rerating – Seeing how low or how high can go to your terminal PE multiple (based on historical average or your estimated multiple)

An example to walk you through this is:

Let’s take the case of Pidilite as of today.

• Shareholder return – 0.43%
• Growth in Earnings – 12.2%
• PE rerating – Let’s say I hold the investment for 10 years and the PE will half, the PE rerating if you see by the rule of 72 will be about -7.2%. Of course, the longer you go, the lower its effect will be on the total return i.e for 20 years it will be – 3.6%, for 30 years it will be – 2.4%, etc.

So the total return of the stock can be estimated as 0.43% + 12.2% -7.2% = 5.43%. Of course, this is conservative, and assuming there is no PE rerating it will be the total return will be 12.63% per annum. If this is more than your required rate of return then it would be a good investment for you. But the assumptions for this to work out are that the stock will not have a significant rerating, and the stock will grow its earnings at 12.2% or more throughout your investment period.