When Price Meets Value: How to Act When a Stock Hits Your Intrinsic Estimate
Most investors guess when to sell. Here’s how we let the math decide.
The Moment Most Investors Get Wrong
You’ve done the research. You bought with a margin of safety. Now the stock price has climbed to match your intrinsic value estimate. Most investors hesitate here.
Some get greedy and wait for more. Others get fearful that they’re selling too soon. Many freeze entirely, unable to act.
But you can’t afford to freeze. Not if you’re serious about compounding.
In our process, we let the math guide our next move. Specifically, the Kelly Criterion tells us exactly how much capital to allocate to each stock at any point in time. And when a stock’s expected return drops, as it does when the price rises closer to fair value, the model gradually lowers our position size. Eventually, it tells us to exit.
Let me walk you through how this works in practice.
Price Alone Doesn’t Tell You When to Exit
Most investors operate on a simple rule: sell when price equals value. It sounds smart, but it’s too rigid. Intrinsic value isn’t a hard number. It’s a range, and that range shifts as new data emerges.
Instead of focusing on price alone, we ask: What is the optimal capital allocation for this stock right now, relative to everything else we could own?
This question becomes even more powerful when we consider that we maintain a watchlist of researched investment ideas, ready to be added as soon as the fit is right. Often, that fit becomes obvious when another holding nears its exit point.
That’s where the Kelly Criterion gives us the edge.
The Role of Kelly in Value Investing
The Kelly formula calculates the optimal size of each position based on expected return and risk. The expected return comes from the difference between the current market price and our estimate of intrinsic value. Risk is measured by the stock’s volatility and its correlation with other holdings in the portfolio.
As the stock price rises toward intrinsic value, expected return falls. When this happens, the Kelly allocation drops accordingly. If the expected return turns negative, the model recommends a complete exit. There’s no need to rely on gut instinct or market sentiment. The numbers guide our decision.
Once we exit a position, we immediately re-evaluate our list of shortlisted stocks to see which, if any, deserve a spot in the portfolio. If nothing qualifies, we’re comfortable holding cash until a better opportunity emerges.
We recalculate portfolio allocations once a month. This accounts for changes in stock prices, revised intrinsic value estimates, and updated correlations. Monthly recalibration ensures that the portfolio remains growth-optimal and closely aligned with our latest research.
Intrinsic Value Is a Moving Target
Even after we buy a stock, intrinsic value continues to evolve. Quarterly earnings may shift the growth outlook. Profit margins may expand or contract. Competitive advantages may strengthen or weaken. Occasionally, we uncover new information that refines our understanding of the business.
All of these variables flow into our updated valuation model. As intrinsic value changes, we re-run the Kelly analysis to reassess the appropriate portfolio weight. A rising fair value may justify an increase. A deteriorating outlook might call for a reduction.
For example, one of our holdings recently faced a tough macroeconomic environment that caused us to lower its intrinsic value. However, the stock price had already declined more than necessary. As a result, the expected return actually improved, and the model recommended a higher allocation. If we had relied on emotion, we might have sold too early. But by trusting the model, we added instead.
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Selling Is a Process, Not an Event
We rarely go from fully invested to completely out in a single move. The process typically unfolds in stages. As the stock price rises and the margin of safety shrinks, the model recommends trimming. As the upside compresses further, we continue reducing exposure. When the expected return turns negative, we exit completely.
This structured, disciplined approach helps us capture gains while managing risk.
Better Ideas Win Capital
When another stock offers a higher expected return and stronger risk-adjusted profile, it receives a larger allocation. That capital has to come from somewhere—usually from an existing holding that is closer to fair value.
This means we sometimes exit positions before they reach their full intrinsic value. Not because we’re giving up on them, but because we’ve found something better. That’s not a failure—it’s capital efficiency.
Letting Math Override Emotion
The decision to sell often triggers emotional friction. You question yourself. You wonder if you’re leaving money on the table. You fixate on round numbers or past highs.
But our model doesn’t entertain emotion. It simply tracks expected return. If that number drops, allocation shrinks. If it goes negative, the stock is removed. This keeps our process clean, rational, and repeatable.
Exit Like a Professional Investor
Selling doesn’t mean giving up on a great company. It means making space for the next opportunity. Our Kelly-based framework keeps us focused on what matters most: maximizing long-term capital growth.
When price meets value, most investors hesitate. You don’t have to. You have the math. You have the process.
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