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 re-evaluate 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.