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A few days ago, my friend Warren put up a question to me on a particular stock. Here is (part of) my reply.

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Dear Warren,

Sorry I didn't make myself clear. To me there are three reasons to buy a certain stock:

1. The issue is trading at much lower a price than its intrinsic value. (This is the traditional method of Graham and Templeton.)
   
2. The company is trading at a fair value and is expected to prosper. In other words, the future value would be much higher. (This is by and large the method of Buffett and Lynch.)
   
3. The company is stagnant and is trading at a fair value, but it provides a certain amount of secure return in the form of regular dividend. (That's why many of us keep a certain proportion of our portfolio in bonds, REIT, or stocks of public utilities.)
   

The more important thing is: An investor should always be clear the original reason of buying a certain stock, because that inevitably hinges on when to sell. In the same order of the above mentioned indications, the reason to sell is:

1. When the price rises to its intrinsic value.
2. When the company ceases, or would foreseeably cease, to prosper. (Or, in the words of Peter Lynch, the story no longer holds.)
3. When the dividend rate becomes unacceptably low.

Sincerely,

CC