Here's yet another angle on the dilemma. In an alternate world...

Here's yet another angle on the dilemma.

In an alternate world where there are no distortions brought about by tax consequences, then I'd say the stock is certainly trading at a premium to intrinsic value, and it should be sold. I would sell my stock in such a "tax-free" world.


But in the real world, where the government takes its cut (a not-insignificant one) of the upside that is locked in, the decision to sell, (even if the stock is firmly believed to be intrinsically overvalued), might still not an obvious one.

Here's an example of such tax-induced distortions that I find influence my selling decisions from time to time:

Assume you have owned ARB (or any other stock for a considerable time period - as in many years, exceeding a decade, even), and you come to the view that the prevailing market price for that stock is above your assessment of its intrinsic value.

Now assuming that - like ARB has been - that the stock in question has been a good investment and has risen dramatically in value during the time you've owned it, such that your capital gain is several multiples higher than your initial cost price, 8-, 10-, 15 times higher, even.

Now, were you to sell such a stock, your Capital Gains Tax liability would be significant, and could very well result in your after-tax realised price ending up being below your assessed intrinsic value.

What is an investor to do in this case?

I have not come to any firm solution to this dilemma, instead consoling myself with the satisfying thought that it's a problem quality to have and that I wish to have more of such problems.