The lark's on the wing
The snail's on the thorn
God's in His Heaven
All's right with the world!
-- Robert Browning
Over the past 52 weeks, the S&P 500 index (SPY) has risen 18%, far more than its long-term average return of 10% and certainly much higher than what Bill Gross now considers the "New Normal" of mid-single digit returns.
Due to this extra-ordinary market performance, I think it is safe to assume that most of us have wildly benefited and our stock portfolios have begun to "bulge at the seams" a bit.
In such an environment, it is easy to become sanguine. I mean if the band wagon is going full speed uphill and you happen to be on it, why jump off? Why not just continue to enjoy the ride? Hey, you can always jump off it when the wagon begins to lose steam.
Those of us who have enjoyed such rides in the past are well aware of the pain experienced when the band wagon stops and starts to roll downhill. It is easy to suppose that you will be able to jump off in time to avoid the reversal but that is easier said than done.
To be clear, I am not making a market call. I decided a long time ago that I don't have the smarts or the skill to determine when the stock market is cheap or expensive. I also don't buy or sell stocks based upon a macro view. I pick individual securities for my portfolio by finding special situations and conducting bottom-up, fundamental analysis.
So let me get back to my dilemma and I only bring it up because I suspect that I am not alone in this quandary:
Many stocks in my portfolio have blown past what I had considered to be full valuation when I had purchased them. Does it make sense to continue to hold them? After all, I don't want to be in cash because cash currently generates near-zero returns. Near-zero returns are no fun.
Let me first give you what I consider, as a value investor, to be a dishonest answer to these questions:
The stock market was at X when I bought these securities, now the market has appreciated to Y. Surely my stocks are also worth more than I had originally valued them so I should just increase my price targets. There, now I feel safe again. Or...
I can be honest to myself and re-value each security that I own based upon the most current information available to determine if it belongs in my portfolio or someone else's. For those of us who manage investor money, this also becomes a question of fiduciary duty.
I am not going to get into the actual process of revaluation because we all have our own way of looking at the world. We use different valuation metrics and have varying return expectations. That said, I think the best question to ask yourself is this for each stock that you own:
If I had no history with this particular stock, would I buy it today at its current price? If so, why?
That's how simple it is, in my opinion. If you find it difficult to justify buying a stock (not holding it, buying it), then do yourself a favor, punt it.
The worst thing that can happen to you is that you could be wrong and lose further upside in a particular name. The good news is that the stock market is not going anywhere and will continue to provide new opportunities.