Graham Sell Decision: Quick Reference Guide

Date: 2025-12-03 For: Value investors following Benjamin Graham's principles

The 3-Minute Sell Check

Step 1: Calculate P/E × P/B

Current P/E: _______
Current P/B: _______
P/E × P/B = _______ (Sell if > 22.5)

Step 2: Fundamental Health Check

• [ ] Earnings stable or growing?
• [ ] Dividend safe (payout ratio < 60%)?
• [ ] Balance sheet strong (D/E < 100%)?
• [ ] No major competitive threats?

Step 3: Market Context

• [ ] Mr. Market rational (not euphoric)?
• [ ] No significantly better opportunities?
• [ ] Tax considerations favorable?

Decision:

• ✅ HOLD if all checks pass
• ⚠️ MONITOR if 1 concern
• ❌ CONSIDER SELLING if 2+ concerns

Graham's Key Sell Signals

1. Valuation Signals (SELL WHEN)

• P/E × P/B > 22.5
• Price > Graham Number by 20%+
• 50%+ appreciation from purchase (for deep bargains)

2. Fundamental Signals (SELL WHEN)

• Earnings decline for 2+ quarters
• Dividend cut or payout ratio > 80%
• Debt/Equity > 150%
• Competitive position deteriorating

3. Market Signals (SELL WHEN)

• Market euphoria (P/E > 30 without exceptional growth)
• Better opportunity available with similar risk
• Emotional decision-making taking over

Monthly Review Worksheet

Stock: _______________    Date: _______________

1. VALUATION (Max 1 minute)
   Price: $_______   P/E: _______   P/B: _______
   P/E×P/B = _______   [ ] < 22.5   [ ] > 22.5 (SELL SIGNAL)

2. FUNDAMENTALS (Max 1 minute)
   Earnings: [ ] Growing   [ ] Stable   [ ] Declining
   Dividend: [ ] Safe   [ ] Risky   [ ] Cut
   Balance Sheet: [ ] Strong   [ ] Adequate   [ ] Weak

3. DECISION (Max 1 minute)
   [ ] HOLD - All green
   [ ] MONITOR - 1 yellow
   [ ] SELL - Any red or 2+ yellow

Action: ____________________________________

Portfolio Rebalancing Rules

Position Sizes

• Maximum 5% in any single stock
• Maximum 25% in any sector
• Maintain 5-15% cash for opportunities

Selling Discipline

1. Trim winners that exceed position limits
2. Cut losers when thesis broken
3. Rebalance quarterly to maintain allocation
4. Document every sale with rationale

Tax Considerations

• Hold >1 year for long-term gains
• Harvest losses to offset gains
• Consider wash sale rules

Emotional Discipline Checklist

Before Selling, Ask:

1. Am I selling for rational or emotional reasons?
2. Has the investment thesis truly changed?
3. Is the margin of safety completely gone?
4. What would Graham do?

Graham's Wisdom:

• "The investor's chief problem is likely to be himself."
• "Be fearful when others are greedy, greedy when others are fearful."
• "In the short run, the market is a voting machine; in the long run, it is a weighing machine."

Case Examples from Current Screening

Strong HOLD Examples (2025-12-03)

Monitor Examples

Sell Threshold

ANY STOCK WITH P/E×P/B > 22.5 - Immediate review required

Quick Formulas

Graham Number

√(22.5 × EPS × Book Value per Share)

22.5 Rule

Fair Value = P/E × P/B ≤ 22.5

Margin of Safety

MOS = (Intrinsic Value - Market Price) / Intrinsic Value
Aim for >30% MOS when buying
Sell when MOS <10%

When in Doubt...

1. Review Graham's principles
2. Calculate the numbers (P/E×P/B)
3. Check fundamentals (earnings, dividends, balance sheet)
4. Assess market sentiment (euphoric or fearful?)
5. Make rational decision (not emotional)

Remember: It's better to sell too late than too early if the fundamentals remain strong. Graham advocated patience and discipline above all else.

"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return." - Benjamin Graham