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Take the Money and Run

For many -- perhaps even most -- investors, buying is the easy part. You read a well-researched article about an intriguing company with a novel business model (the next Netflix (Nasdaq: NFLX  ) , say) or a long-haul overachiever whose shares have taken a beating (Dell (Nasdaq: DELL  ) , anyone?), and after conducting some back-of-the-envelope due diligence and formulating what Peter Lynch calls a "two-minute drill" investment case, you dive on in.

Easy as pie, right? Well, compared with selling, it sure is. And that's especially true when you're contemplating whether to shed shares of a company that's made big bucks for you. With that in mind, here are three questions and a Foolish suggestion to contemplate the next time a prospective sell decision keeps you up after The Colbert Report has signed off.

1. Is the stock "priced for perfection"?
Even for growth investors, value-investing luminary Ben Graham's "margin of safety" concept is key. As a stock's price ticks up, after all, that margin, which Graham measured relative to what he called "intrinsic value," shrinks as your investment risk expands. High-fliers simply have further to fall when the market hits the skids.

The upshot? If the price multiples of a company you hold have expanded at a market- or (more significantly) industry-shellacking pace, you may want to consider at least paring back your stake and investing the proceeds in a firm with a cheaper valuation profile -- and further room to run.

2. Have you fallen in love?
Buying to hold is a Foolish investment principle, but don't think you're married to a stock. Though they're not apparent in the same way that, say, brokerage fees are, "opportunity costs" -- i.e., the gains you forgo by keeping your moola locked up with your "betrothed" -- can be painfully real.

Consider, for example, the fate of someone who has remained steadfast in his or her commitment to S&P 500 index investing. To be sure, holding a chunk of change in a world-class fund like Vanguard 500 Index (VFINX) can be a smart, money-making move. Over the past five years, though, investing exclusively in such a puppy -- which is dominated by large-caps -- would have meant missing out on the outsized gains from the market's little fish.

The moral? It's no sin to cash in some of your chips and plow 'em back into other areas of the market. Indeed, doing just that can increase your wealth and help keep volatility under wraps.

3. What's shaking?
Last but not least: significant corporate events. Management shake-ups like those in the works at Hewlett-Packard (NYSE: HPQ  ) and Bristol-Myers Squibb (NYSE: BMY  ) or massive restructurings like the one under way at Ford (NYSE: F  ) may turn out to be for the best -- or not. That logic applies to "acquisition benders," too. The smaller companies that tech titans IBM (NYSE: IBM  ) and Oracle (Nasdaq: ORCL  ) have snapped up of late may be smart revenue diversifiers -- or simply signs that the parent companies' days of "organic growth" are behind them.

Which is it? Tough to say in the near term, but that shouldn't prevent savvy investors from taking these important corporate events and others -- such as heavy insider selling -- as invitations to "stress test" their two-minute drills. If your investment case still holds water, keep on keeping on. If not, weigh the tax consequences and plot an exit strategy.

A Foolish suggestion
As the above probably makes clear, it's not for nothing that plenty of smart investors consider selling to be the hardest part: Valuations, opportunity costs, and significant corporate events are just three factors you need to contemplate before pulling the trigger on a sell order.

With that in mind, here's a suggestion: Consider cherry-picking just a handful of individual stocks that you can follow diligently while plunking down the lion's share of your moola in world-class mutual funds, picks whose managers have long-haul track records of success when it comes to both buying and selling.

Champion Funds is the Fool newsletter dedicated to the cause of finding such funds, and so far, so good: Since opening for business in March 2004, our picks have beaten the market by roughly 8 percentage points. If you'd like to take a look at our list of recommendations -- as well as the service's model portfolios and members-only discussion boards -- a free 30-day guest pass is available. There's no obligation to stick around if you find it's not for you. You've got nothing to lose -- and less stressful sell decisions to gain!

Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service, and at the time of publication, he didn't own any of the securities mentioned above. Dell and Netflix are Stock Advisor recommendations. You can check out the Fool's strict disclosure policy for yourself.

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