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The Sensex is back just under 5% over the past year, by no means a bull market.

But what about returns like 203%, 202%, 74% and even 43% over the past year?

Can you call this a bull market? Yes, I think so.

These are the revenues of Titagarh Wagons, RVNL, IRCON and RITES respectively in the past year. And judging by their size, there is definitely a bull market going on here.

Besides their impressive returns, these four stocks have one thing in common. Their fortune is linked to the fortune of India’s railway sector.

If India’s rail industry grows rapidly, these stocks would be among the biggest beneficiaries. No wonder, they are also called railway equipment. Even we even have a stock quote page dedicated to railroad stocks.

Anyway, this piece isn’t about whether you should buy railroad stocks, especially after their crazy run-up over the past year or so.

This piece is about the right exit strategy for them. Does it make sense to book a profit or is there still a lot of steam in these fast-puffing stocks?

The conventional wisdom about exit strategies is pretty straightforward. It says that you must sell a stock if it meets one of the following three conditions.

Your original thesis has been modified.

You realize you made a mistake.

You have found a better opportunity.

No doubt these are solid reasons to sell a stock. However, the problem lies in its implementation.

How do you know if your original thesis about a stock has changed? Perhaps the change is only temporary in nature and the stock will get back on track in a few months.

And how do you know if you made a mistake when analyzing a stock? In fact, there can be a lot of confusion about what even qualifies as an error in the first place.

Finally, the point about selling your stock when there’s a better opportunity elsewhere is a good one in theory. But when it comes to practice, there are many complexities.

How does one know for sure whether the other stock is a better opportunity or not? Are you judging it based on business quality or underlying valuations? Should the other stock also be twice as good as the one you’re considering selling or only marginally better?

I hope you get a good idea why selling is so hard. And this applies not only to the railway stocks discussed, but also to the whole.

You can find hundreds of pieces on the internet on how and when to sell your stock. Yet their practicality leaves much to be desired.

So if literature on selling is of little use, how about learning the art of selling from the personal experience of stock market gurus out there?

And when it comes to gurus, who better than Warren Buffett.

Can we look at Warren Buffett’s sales history to understand his thought process around it? Does the Oracle of Omaha have an exit strategy that he has used repeatedly in the past?

I’m sure some of you are wondering that Warren Buffett is the wrong person to learn the art of selling from. After all, one of his favorite words is that his waiting period is forever.

In other words, once he buys something, he likes to hold on to it forever. So, what can a person who dislikes selling teach us about how and when to exit a stock?

Well, there is a difference between ‘Buy & Hold’ and ‘Buy & Forget’. And Warren Buffett is certainly not the “Buy & Forget” investor.

His holding period may be forever, but he has been known to sell many stocks that he felt had changed fundamentals for the worse and no longer deserved to be held forever.

Consider, for example, Tesco, one of its most high-profile investments. Warren Buffett first bought shares in this British supermarket giant in 2006. However, he started selling the shares in 2013 and was completely out by 2014.

So, is there a lesson we can learn from Buffett’s holding Tesco for about 7 years and then abandoning it completely within the space of a year?

Well, as Buffett himself admits, he made a “big mistake” in selling his Tesco shares as the supermarket’s problems continued to escalate.

In his view, a more observant investor would have sold Tesco much sooner and may have avoided the massive $444 million losses he suffered on the stock.

The lesson here is that even a brilliant investor like Warren Buffett doesn’t have a well-defined sales strategy and has made mistakes like Tesco.

And if you thought Tesco was an exception, here’s another one of its fiascos: Dexter Shoes.

Buffett already bought Dexter Shoes in 1993. And to make matters worse, he paid the $ 433 million as acquisition costs in the form of shares of Berkshire Hathaway. Instead of paying in cash, he paid $433 million in Berkshire Hathaway stock.

About 8 years later, the Oracle of Omaha continued to lick his wounds as the competitive edge he thought Dexter had vanished. The company had to shut down shoe production in the United States and another overseas location, and what remained was merged with another Berkshire unit.

The loss for Buffett was not the $433 million he paid to acquire Dexter. It was $3.5 billion because Berkshire stock that was worth $433 million in 1993 was worth $3.5 billion in 2001. As Buffett himself admitted, Dexter was the worst deal he made at the time.

I started this piece to get some insight into selling. I was looking for a good exit strategy so that I can help investors in stocks like Titagarh Wagons, RVNL and IRCON to prepare a good exit plan.

But I drew a void to be honest. The first strategy we discussed sounded good on paper, but raised big question marks in theory.

Then we tried to follow Warren Buffett and realized how even he didn’t have a cohesive exit plan. In fact, we were surprised to learn that he had made the blunders you’d expect from a novice investor, not someone of Buffett’s caliber.

We’re back to square one. We have yet to find a proper solution to the burning question that plagues investors in railroad stocks.

So when exactly should we sell our shares?

I think we made a mistake looking for a good exit or sales strategy. We may have tried to look for complex solutions.

We thought that since there are so many factors involved, a sales strategy would be a multi-step process involving quite a few data points.

What we had not taken into account, however, was that in a field such as investing, simple rules of thumb and back-of-the-envelope calculations usually prove more effective than complex solutions.

Yes, you read that right. Instead of looking for a complex sales strategy, how about choosing an extremely simple one?

And there is one that I am particularly fond of. The strategy is not only simple, but also works for most stocks.

Once you buy a stock, you sell it after a 50-100% return or a two-year holding period, whichever comes first.

You see, for the first few years of my career, I was more about making a lot of money in stocks. I was always looking for the next multibagger. However, I didn’t have the success I expected.

Or I was wrong in estimating the strength of the company’s or management’s competitive advantage or both.

And on the rare occasions when I got these elements right, I advised the stock at expensive valuations.

Consequently, large stocks of multibagger have always been elusive. I don’t recall ever succeeding in recommending a big fat multibagger to my subscribers.

Moments later, I realized that investing isn’t just about finding the next big multibagger. In fact, you’ll probably have more success going after the more “sure” money than the “big” money.

Let me repeat that. If you haven’t had success making “a lot” of money with a handful of stocks, you can try betting on the “more certain” money.

You see, most stocks are cheap at one price and expensive at another. Therefore, you only need to buy these stocks when they are available cheaply and sell them when they become expensive. It is similar to buying a stock that you think is worth it €100 per share €60 or lower.

Viewed in this way, selling becomes quite easy. You buy something €60 or lower and then sell it when it reaches €100 or slightly higher.

By the way, this is exactly what I do in my referral services like Microcap Millionaires and Exponential Profits.

I recommend that stocks are trading at a good discount to book value or available at a PE multiple of 10-12x. I then recommend a SELL after they are up 50-100% from their recommended prices.

The nearly 80% success rate I’ve achieved with this is proof that this approach works in the long run.

As I said before, my goal is not to make “big” money. It is not to recommend multibaggers. Instead, it’s to try and guide my subscribers to making the more “certain” money they’ve made from 80% of the recommendation I’ve closed over the years.

Getting back to the original question of whether you should sell your railroad stocks, it may help to evaluate the decision from a “more secure” money making perspective.

Are these stocks still trading at a P/E multiple of 10-12x or are they available below book value? If the answer is yes, one might consider investing in it even at current levels.

But if one has already achieved 50-100% returns in it or even higher, then a partial if not complete exit can certainly be considered.

My goal is not to make multibagger returns from these stocks. For that you need to evaluate in detail the competitive advantages of these stocks, appeal to the quality of management and estimate their earnings several years later.

Personally, I find this method complex and therefore I am happy with the 50-100% returns over 1-2 years. I’d rather earn a series of 50% returns across 4-5 different stocks than stay invested in a single stock hoping it will be a 10 bagger.

I’m not saying my approach is the right one. All I’m saying is it’s the one I’m more comfortable with. Likewise, you should choose the one that better suits your temperament.

Have fun investing.

Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.

This article is from Equitymaster.com