Step 10: Don't Sell Too Soon

When should I sell? This is one of the most frequent questions we hear. Our glib (yet truthy!) answer: Never. We'll come back to that ever-so shortly, but in the meantime, here are five reasons we do sell stocks.

Reason No. 1: Better opportunities
Sometimes, there's nothing wrong at all with a company or its stock: There are simply better opportunities elsewhere that will bring us more bang for our bucks. We will consider selling a less attractive stock (even at a loss!) if we think we can get a better deal elsewhere.

Reason No. 2: Business changes
There's no way around it: Businesses change -- sometimes significantly. We could be talking about a major acquisition, a change in management, or a shift in the competitive landscape. When this occurs, we incorporate the new information and reevaluate to see if the reasons we bought the company in the first place still hold true. We will consider selling if:

  • The company's ability to crank out profits is crippled or clearly fading.
  • Management undergoes significant changes or makes questionable decisions.
  • A new competitive threat emerges or competitors perform better than expected.

We'll also take into account unfavorable developments in a company's industry. Here, it's important to delineate between temporary and permanent changes. In a downturn, financial figures may suffer even for the best-run companies. What's important is how these businesses take advantage of the effects on their industry to improve their competitive position.

Reason No. 3: Valuation
We're all for the long-term here, but sometimes Mr. Market shows our stock too much love. We will consider selling if a stock price has run up to a point where it no longer reflects the underlying value of the business.

Reason No. 4: Faulty investment thesis
Everyone makes mistakes. Sometimes, you'll just plain miss something. You should seriously consider selling if it turns out your rationale for buying the stock was flawed, if your valuation was too optimistic, or if you underestimated the risks.

Reason No. 5: It keeps us up at night
It is tough to put a dollar value on peace of mind. If you have an investment whose fate has whirled such that it now causes you to lose sleep, that could be a great cue to move your dollars elsewhere. We save and invest to improve our quality of life, after all, not to develop ulcers. Adding insult to injury, stressing about a stock might cause you to lose focus and make rash decisions elsewhere in your portfolio. Remember, there's no trophy or prize for taking on risk in investing. Stick with what you're comfy with.

Know When to hold 'em
So that's when you fold 'em. But holdin' 'em? Remember, we're long-term investors, not weak-kneed speculators. Over the course of what will be a prosperous investing career for you, the market will rise and fall. Recessions and booms will happen. And all the while, you must stay focused on the long term. Fear is never a reason to sell.

Action: Put it in writing. For each stock in your portfolio, write down why you bought it, your expectations, and what would make you sell. (In fact, write it as pitch in Motley Fool CAPS and get the benefit of some collective wisdom.) Refer to it frequently -- and before you decide to give your stock the heave-ho.


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Read/Post Comments (11) | Recommend This Article (297)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 29, 2009, at 7:34 PM, webtactechs1 wrote:

    11. Sell first, ask questions later! Remember you can always buy it back, a winner is a winner!

    12. When you feel that pit in your stomach growing because you are "made of money now!"

    13. When you find yourself bragging about your gains- knock on wood! Happens to me every time. As soon as I am up 300 percent I open my big mouth and the whole world goes crashing in!

    14. When your account spikes you know when!

  • Report this Comment On February 24, 2010, at 7:34 PM, robbglass wrote:

    Dear Fellow Fools,

    I have fairly faithfully bought recommendations of SA, Pro, GG, RYR, Options, RYR, and MDP resulting in a portfolio of 56 equities and about 20 very small options positions. I cannot properly manage my portfolio which has not performed quite as well as Dave G's, though I have absolutely no complaints about long-term performance.

    My observation is that I have a decent portfolio so why would I subscribe to a superb stock and option picking service. I think I need to nurture the portfolio I have.

    What service does MF offer to steward a sound portfolio ?

    Fool on!

    Rob Glass

  • Report this Comment On January 11, 2011, at 8:19 AM, kyith wrote:

    i think what matters more than all these is how much you have invested and how much you don't have when you are losing money.

    A compelling case is an example here >>

    If you make money make sure it is worth the trouble else when you lose money ensure that proper risk control is in place.

  • Report this Comment On February 18, 2011, at 4:57 PM, mountain8 wrote:

    For every story I've heard about selling at a LOSS, I've heard of one that went way up just after selling at a LOSS. If you want a list of my own, just ask.

    For every story I've heard about selling for a GAIN, I've heard of one that went way up more just after selling at a GAIN. If you want a list of my own, just ask.

    Webtech: "11. Sell first, ask questions later! Remember you can always buy it back, a winner is a winner!"

    Do you count what you 'lost' or 'didn't win' while you were waiting for your sold stock to become a buyback? How 'bout selling Apple at $50 then buying it back at $300? A win is not always a WIN!

  • Report this Comment On July 11, 2012, at 4:35 PM, 401King wrote:

    Long-term does not mean 'forever.' Warren Buffett has large positions in many companies and he buys and sells shares based on valuations: when the shares are overvalued, he sells some; when they are undervalued, he buys. One of his greatest quotes is 'Buy when everyone else is selling, and sell when everyone else is buying.'

  • Report this Comment On November 12, 2013, at 9:27 PM, LizzieBennet wrote:

    OK, I'm still a babe in the woods here...what's a bagger? And what do the number increments mean? (5 bagger, 6 bagger, and so on) Please explain when you stop laughing! :)

  • Report this Comment On November 20, 2013, at 4:41 PM, TeamMAVS wrote:

    As a complete newcomer to investing, I hadn't heard the term "bagger" either, until TMF staffer Jim Gillies spoke to my MBA class last weekend.

    The term just means how many fold a stock has increased while you've owned it, so a $3 stock that goes to $30 is a 10 bagger, for example.

    I hope my first post was a helpful one!

  • Report this Comment On May 26, 2014, at 2:16 PM, malandru wrote:

    Selling by valuation: What measurements exist to say a company is over- or undervalued?

  • Report this Comment On July 17, 2014, at 9:17 PM, nwfl890 wrote:

    I'm wondering the same thing as malandru, how do you know that a company is over- or undervalued?

    Assuming that the answer is here somewhere on The Motley Fool's website. The beginner's board?

  • Report this Comment On April 09, 2015, at 6:23 PM, BaltMoron wrote:

    As an individual investor nears retirement, passing say that magic threshold of 5 years to go to retirement, wouldn't that override the considerations above as far as your overall portfolio would be concerned?

  • Report this Comment On November 19, 2015, at 10:36 AM, CMF_Fuskie wrote:

    I would add that if a company becomes so large a holding in your portfolio that it becomes an adverse risk, it may be time to sell or trim it down to size. Just like you would do to a tree or bush that threatens to overrun your lawn or cast such a large shadow that it cuts off the light to other greenery.

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