Hey friends. My book, Choose Stocks Wisely, reflects my attempt to define a low stock price using the balance sheet as the primary tool. The book does not discuss “selling high.” When to sell is the more difficult judgment call to make as it rests more on future prospects than it does on the present substance of equity as defined by the balance sheet.

How much future (earnings) does an investor judge as reasonable to incorporate into a stock price before a “high” price is achieved? There are some attempts out there at defining a “neutral” or “fair” price” like that of Peter Lynch. Go here to read about Lynch’s PEG (Price to earnings/Growth) ratio. But when is it “enough” to achieve “high?”

Remember that buying a share of stock is buying a share of company equity. Company equity is found on one financial report, namely the balance sheet. So, the balance sheet gives a number that attempts to describe the financial worth of a company at a specific point in time. And one buys a stock at a specific point in time. By careful analysis of the most recent balance sheet equity, I can improve the quality of my “buy” decision — the goal being to locate the largest amount of quality equity for the price paid to own a share of it.

Both decisions, buy and sell, come down to judgment calls. But the buy decision is now and there is financial information about the equity as it stands now (on the balance sheet). The sell decision involves factoring in future performance and its influence upon the equity. That is, it involves predicting what company growth will be and how much it will make the equity worth at some future point. Thus, trying to substantively define “high” is far more like throwing darts than the attempt to define “low.”

My practice is simply to do the best I can at defining low to enable making a good judgment call on that end. One always wants to avoid default risk altogether and also to limit downside risk to the extent possible by both evaluating the balance sheet carefully and the company outlook landscape before buying. That gives the best opportunity at consistently witnessing an improvement to the worth of your investment because little to no prospecting on future performance is factored into the stock price. While I don’t know where “high” is, the likelihood of selling higher than my entry point is very good. And that’s good enough for me because once some future has been factored in, there’s always another company that has not had much prospecting come its way yet. Selling to participate in those other opportunities keeps the risk level low and the upside potential higher. It boils down to buy low, sell higher.

See you next time.