One of the hardest things for individual investors to do is to know when to sell a stock. Many times, you might sell simply because a stock has gone up and you’ve made some money. More often than not, though, this is not a great reason to sell [because, as mentioned in the title of this article,] you will never – ever – have a 10-bagger if you sell a stock after a 2-bagger. [That being said, what things should one consider before selling?] Words: 912
So asks Peter Hodson (www.sprott.com) in edited excerpts from an article* originally written for the Financial Post which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Hodson goes on to say, in part:
Most investors understand, in concept, [that they shouldn’t sell a stock simply because it has gone up rather than waiting for it to go up dramatically] but many practical reasons get in the way [of them not doing so]:
For the average investor owning, say, a portfolio of bank, energy and utility stocks, it is next to impossible these days to even get a double on a stock. If you are buying larger, blue chip, dividend-paying companies, you need to settle for a lower return, and might be very happy with a 10% gain.
Many investors simply find they need the money, and just can’t let a winner ride because life expenses get in the way. For retail and professional investors alike, it is always easier to sell a stock that is up.
There is a whole army of market participants that WANT you to sell your stocks. Your broker may have a new investment idea that they want you to switch into. An analyst may downgrade a company, causing you to worry about its prospects. Short-sellers may make you nervous about what you might not know about a company. Stock message boards might make you panic even more.
So, if you are an individual sitting on a 30%+ gain on a “normal” type of company (i.e. not a high-growth small cap or a resource exploration play) then what [should you] do? Here are some things to consider:
- Compare your company’s returns with the market’s returns. In the post 2008 recovery, for example, even stable blue chips doubled. If you had an absolute return target in mind, you might have sold at that target and missed out on much bigger gains in the full market recovery. Always consider your gains in the context of what else is happening.
- Watch the weighting of the company in your portfolio. Often, the best reason to sell is for diversification purposes. If you have more than 20% of your assets in any one company, then you are really taking a “bet” on that company, because your portfolio’s results will be tightly tied to its performance. That is not investing, it’s gambling. Selling for diversification purposes also helps you take the emotion out of your decision.
- Watch the yield on your investments. If you can find higher dividends elsewhere, you might improve your income by switching into something else. Keep in mind, though, that you will likely pay 23% capital gains taxes, so if you are switching just for yield your new investment needs to yield that much more than your old investment, or you won’t be any better off, after taxes.
- Watch for dramatic changes at the companies you own. Rapid management turnover, increased debt loads, a change in business direction (such as buying a brand new business unrelated to the current business) or adding tons of debt may also be reasons to sell. Basically, you want your companies to be slow and steady growers-boring yes, but boring is often the best when it comes to your investments.
If [the above] are a few reasons for selling, what, then, might be reasons NOT to sell? I would suggest the following might not be good reasons to sell:
- Analyst downgrades. These happen too often, and, unfortunately, don’t have a highly accurate track record;
- Missed quarterly earnings: In my view, if you have a five to ten year investment horizon and you sell because a company missed its 90-day earnings, you may need to examine whether you are, in fact, a trader rather than an investor.
- Insider selling: While I never like it when company executives sell their own stock, it does happen, so the executives can pay taxes, buy houses and so on. Rarely does it mean individual investors in the stock should sell also. One caveat here, though. If a senior executive sells ALL of their stock, it is generally a pretty good warning sign that something is not right at the company.
- Because it is up. Just because a stock is up doesn’t mean you should sell. Find out why it is up-accelerating earnings maybe, or better cost control. While it is true you will never grow broke taking a profit, you will pay taxes and may miss out on a true long-term winner.
Other Excellent Articles by Peter Hodson:
There are dozens of phrases and quotes that can get in the way or your stock market success. [In this article I have identified a number of them and conveyed why each and every one should be totally dismissed.] Words: 910
Sooner, rather than later, [excessive] volatility will break out again so it is important for investors to have a game plan in place for such a future event. [Below is just such a plan that I would like to share with you.] Words: 1469
Investing in the stock market is hard enough. The last thing you need is to find yourself owning a company that has questionable accounting, disclosure or other policies. [Below is] a review of 5 things you should watch out for when investigating companies for a stock investment. Words: 740
Imagine living in a country where the government suddenly decides to make it illegal to hold a certain type of asset, and goes on a systematic process to relieve its citizens of such an asset? Such actions happen in wartime and by politically-corrupt regimes but how about private-asset seizure in the good old U.S.A.? Well, it has happened before. [The 64 trillion (in keeping with the times) dollar question is: “Will it happen again?”] Words: 585
Since there is such a wide range of emotions, it might be helpful for you to do a ‘gut-check’ before you actually buy or sell any type of security. Knowing how you “feel” about investing might turn out to be just as important as knowing what you “know.” Words: 737