Stock Market Investing: Knowing When (and when not) to Sell

One of the greatest challenges of investing in stocks is developing a "sell discipline". Some of the most adept investors struggle with the decision of when to sell.

First, recognize that there are no absolute formulas to tell us to sell at precisely the right time. Instead, we'll need to consider a bundle of factors such as the investment's characteristics, the broad economy, and your own needs, with an eye to market trends. The answer will come from some combination of these hard-to-quantify characteristics.

If you'll need cash soon, for whatever reason, you should be more ready to sell, especially if a stock becomes less of a sure thing. Similarly, if the economy is weak, we might be more motivated to take profits (or even losses) in stocks which are sensitive to economic swings, while a strong economy might allow us to hold tight.

Most important, however, is the intrinsic value of the stock itself. A simple rule plays out here: buy when a stock is under-valued (when the stock sells for less than its intrinsic value), and sell when it is over-valued (priced above intrinsic value). The trick is measuring intrinsic value, which can be done many different ways. We'll talk about measuring intrinsic value more at another time, but regardless of how we measure it, we had to have an idea of what the company was actually worth when we bought it. So, if we reach that target, we can start thinking about taking profits. It isn't always necessary to sell out immediately, though. For a pure value stock, we should sell somewhere in that range, but if the company is expected to grow, we can wait longer and take advantage of that growth. Perhaps, as a rule of thumb, wait until the stock reaches a price double what we think it's worth. Of course, this is a personal decision, too, and depends on how patient you are, and how much you have invested. At this point, the "easy money" has already been made.

Market Trends. It is our firm position that market trends alone should never lead to buying or selling a stock. However, if we've already decided to sell, trend indicators, used carefully, can enhance profits. For example, if a stock is in a solid uptrend that shows no signs of slowing, it may be profitable to wait for the stock to approach a short-term top before selling. Beware that you don't hold too long. Better to sell early than late. Eventually the market will catch on to reality, so if your evaluation of the stock is right, the risk of holding on too long can be far greater than the small benefit from holding out for that extra dollar.

A few other errors to avoid:

Don't avoid selling because you're emotionally attached to a stock. Circumstances change over time. There's no reason to beat yourself up over it. Just dump the loser and move on.

Don't sell when panicked. Panic is an emotional response, and usually wells up when things aren't going your way but you can't tell why. Know why you want to act. Until you can make a judgment about why to sell, it's probably best to hold on and wait out the fear.

Don't sell when worried. In many ways, worry is similar to panic, if a bit milder. It is still an emotion, and one that should be controlled. Stocks are often said to "climb a wall of worry", which means that they will ease upward through difficult times. When news is worrisome, but not devastating, the only remaining catalysts are good things, as all the bad news has probably already been factored in by selling among the worrywarts.

Don't sell when bored. Just because a stock isn't moving doesn't mean it was a bad selection. It may just indicate that you're smarter (and therefore earlier) than the market hordes. If you're still convinced it was a good choice, hold firm and wait for everyone to catch on to your wisdom. Especially with value stocks, it can often take a year or longer before the mainstream recognizes a good stock, and that's when the price will start moving. Patience is a virtue.

In the end, every selling decision is a personal one, and must balance out all the factors we've mentioned. The most important rule, of course, is to sell when it benefits YOU.

To send comments or to learn more about Scott Pearson's Investment Management Services, visit http://www.valueview.net

Scott Pearson is an investment advisor, writer, editor, instructor, and business leader. As editor and publisher of Investor's Value View, a national investment newsletter, he provides general money tips and investment advice to readers, and demonstrates a special knack for locating the up-and-coming stocks in the burgeoning high-tech industries. As President and Chief Investment Officer of Value View Financial Corp., he offers investment management services to a wide variety of clients.

In The News:

How the Stock Market Works | Investing 101  U.S. News & World Report
How to Invest in Preferred Stock ETFs  U.S. News & World Report
The 25 Best Mutual Funds of All Time  Kiplinger's Personal Finance

Complacency

During the month of January the Dow Jones Industrial Average,... Read More

Race Horses and Mutual Funds

For years investors have been taught to look into the... Read More

Small-Cap Stocks: The Beginning of the Journey

When an individual investor wants to roll up his sleeves... Read More

Time Out

Are you paying any attention to your retirement savings? Do... Read More

The Bottom?

Every day I hear someone on CNBC proclaim that "this... Read More

The Shadow

The Shadow knows. There used to be a radio program... Read More

Staying Sane While Wall Street Crashes

Everybody is riding the Wall Street Roller coaster. Even if... Read More

Learn to Calculate a Stock?s Pivot Point

Stocks breakout from properly formed bases everyday but many investors... Read More

NASDAQ 800?

In November of 2000 when the NASDAQ was trading at... Read More

Hot Stock Trader: How to Pick Momentum Stocks with Ease and Simplicity

Most stock traders know that momentum trading can be a... Read More

The Importance of Using Stop Loss Orders When Spread Trading the Financial Markets

A Guide to Using Stop Loss Orders Stop losses are... Read More

How To Make, And Keep, Money Trading Stocks

If you are serious about making and keeping money by... Read More

Overseas Investing: Going Against the Mainstream

TOO OFTEN, INVESTORS SIMPLY CHOOSE TO follow the crowd. This... Read More

Humpty Dumpty the Stock Market Falls Down

Humpty Dumpty had a great fall and all the King's... Read More

What Are You Waiting For?

Do you own any mutual funds? In an IRA or... Read More

Starbucks Stock is Up

Starbucks earnings are up again and so is their stock... Read More

Nest Eggs and Omelets

Do you have a nest egg? You know, a place... Read More

Trading Systems

To become a successful trader you must have some kind... Read More

The Cub; II

We keep hearing about this bear market and that the... Read More

Advisory News Letters

Several times each month I am solicited by various market... Read More

Discover the Biggest Trading & Investing Online Mistake

Any online investor / trader seeks an excellent off or... Read More

Market Experience of a Naïve Stock Operator

Sometime in the third quarter of 1997, someone told me... Read More

Duck

Duck! No I don't mean a quack, quack. I meant... Read More

Its A Duck

If it walks like a duck, quacks like a duck... Read More

Advantages and Disadvantages of Mutual Funds

Outlined below are some of the advantages and disadvantages of... Read More