Buy And Hold Vs Valuations

Q. Selling expensive stocks when they become expensive. Is that a good idea?

Let us analyse the buy and hold strategy versus valuation driven selling:

Selling the Coffee Can Portfolio when the Nifty P/E is above 20 does not outperform ‘Buy and Hold’:

Here, the author and his team sold the stocks when the Nifty’s trailing P/E multiple went above 20 times and invested in government bonds. After this, they waited for a year before making a reinvestment decision. Such a decision is taken only if the P/E multiple drops below 20 times.

Conclusion: 

An investment policy that sells the Coffee Can Portfolio when Nifty is trading at above a certain P/E multiple, and buys Coffee Can Portfolio when Nifty is trading below a certain P/E level does not generate any outperformance compared to buy and hold strategy.

The findings above make sense when one realises that the company that does make it to the Coffee Can Portfolio enjoys some sustainable competitive advantages over its competitors and reflects this in the share price performance.