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Is It Time to Sell?

Lighten up ... rotate out ... take a little off the table.

However you say it, it means "selling," and I still say selling is tricky business. So, before you reach for the ripcord now, ask yourself this:

"What if I had never sold a stock?"
Honestly, would you have more money now, or less? I set out to answer that question myself this morning -- and to back it up with hard data. Then I chickened out.

I knew the answer. If I had never sold a single stock, I would be ... richer than I am today. How much richer? Much richer. I can't give you a precise figure because I knew that once I saw it for myself, I would lose it.

It gets worse and worse and worse
I bought Cisco Systems (Nasdaq: CSCO  ) on a tip back in April 1990. I dumped it the next year for a quick double. OK, that's not exactly true. In fact, it's a lie. But I'm trying to make a point here.

Think about it: "I sold Cisco in 1991" is a pretty dark secret to have to reveal to another investor -- even if it was for a double. Since then, the stock is up another 11,150%. You read that right, and that's after the unwinding of the tech bubble and the recent correction.

For the record, I didn't flip Oracle (Nasdaq: ORCL  ) for a quick double, either. But I know how it feels. If you were to pull up a 10-year chart for XTO Energy, you'd see a 45-degree ramp skyward, connecting three bucks to the ... top of the freakin' world. OK, only to about $70, but still.

You guessed it. I owned XTO for a few months back in 1999. Sold it for a quick double and never looked back. It's since pulled back to around $40 -- but still. That's a 10-bagger. I call it the most painful double of my career.

"And what did you do with the cash?"
How should I know? I probably bought another stock, but do you think it did as well as XTO? I know I didn't have a better stock in mind when I dumped it. I don't recall buying a house or furnishing one, either. (You'll see how this is relevant, believe it or not.)

No, I sold my meal ticket to lock in a gain. But what did I really "lock in"? Zip. You never do, unless you pull that money completely out of the market, which is not something I think you should consider now, especially if you're in your prime investing years like I am.

In other words, I don't think you should try to time the market. A lot of folks claim to do it -- and a few actually seem to pull it off -- but not me. In fact, you might want to brace yourself, because I'm going one giant step further than that.

I barely believe in valuation
At least, not when it comes to selling. Sure, stocks get so attractive sometimes that you have to buy -- for example, when the big banks were priced for bankruptcy in 1990. Citigroup (NYSE: C  ) and U.S. Bancorp (NYSE: USB  ) practically got chopped nearly in half in a matter of months.

That's how I ended up with a boatload of Bank of America (NYSE: BAC  ) , which I've added to during the recent sell-off (bold move, I know). In other words, I think "value" can work for you when buying. But the math gets dicey when it comes to selling -- especially growth stocks and especially big winners.

The fact is, I've met some great stock pickers in my day, but not many great sellers. Come to think of it, I've never met a great seller.

Promise me you won't get too cute
That's why I wasn't surprised to hear that my old pal Andy Cross and his partner Seth Jayson are imploring their Motley Fool Hidden Gems subscribers to follow Warren Buffett's lead and buy this market. They work hard and stick to the fundamentals.

Plus, as dedicated small-cap value investors, they're fishing in a rich pond. Wall Street isn't snooping around these lesser-known stocks yet, which creates inefficiencies and pent-up demand, as I learned the hard way myself with XTO in 1998.

But just so you don't write me off as a cheerleader, I'll let you in on a secret: I use the Hidden Gems guys to lead me to undervalued small caps with big potential. From time to time, they tell me to sell, but I typically don't listen -- and I probably won't in the future. Especially not if it's a winner. I never sell on valuation.

That's how tragedies happen
After all, market-timers tell you that buy-and-holders like us get wiped out in bear markets. But then you pull up chart after chart of "boring" old stalwarts -- even so-called cyclicals like Alcoa (NYSE: AA  ) and 3M (NYSE: MMM  ) -- and what do you see? A gentle slope skyward. So, how on Earth did anybody ever lose money on stocks like that? Good question.

Know what else looks like that? The S&P 500 -- a.k.a. the market. Granted, when you zoom in on a period like we're going through now, the ride gets bumpier, but the long-term trend is up. So, how do you lose money in the market over the long term? I imagine you either buy at the tops -- and only at the tops -- or you get cute and buy and sell along the way.

Consider this approach instead: Sell stocks when you want to buy a house, furniture, or something else you'll pass on to your kids. Sell when you have too much in stocks and you want to buy some bonds, gold, or collectibles. Sell when you have too much money in any one stock. But sell a stock purely on valuation at your peril.

OK. Enough preaching
Like I said, when you're a member of a stock-picking advisory service like Hidden Gems, much smarter investors than I will tell you when to lock in your gains. But remember, the choice to sell is always yours.

And right now, I'm not selling. I'm buying. If you'd like to join me, but are maybe a little gun-shy or short on new ideas, how about this: Take a free 30-day trial to Hidden Gems right now. You'll get Andy Cross and Seth Jayson's top five picks for new money right out of the gate.

Then you can take a whole month to check out the members-only website and complete service and verify everything I've just told you without risking a cent. But whatever you decide, just promise me you won't get too cute.

For a peek at the five stocks the Hidden Gems team is recommending for new money right now, and to find out more about taking a no-risk free trial, click here.

This article was originally published on July 22, 2005. It has been updated.

Fool writer Paul Elliott promises to keep you posted on the progress at Motley Fool Hidden Gems. Paul owns shares of Bank of America. US Bancorp is an Income Investor selection. 3M is an Inside Value pick. The Motley Fool is investors writing for investors.

Read/Post Comments (6) | Recommend This Article (16)

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 January 30, 2009, at 10:09 AM, briboe wrote:

    Tired of these worthless retreaded articles. And I'm sure the only idiots recommending them are the authors!

  • Report this Comment On January 30, 2009, at 10:15 AM, TexasLonghorns wrote:

    Right on the money, "briboe", I strongly suggest anyone thinking about buying any of "The Fool" newsletters check their performance out at "The Hulbert Financial Digest", the returns claimed are not there and they make some LOUSY picks. That "Million Dollar Portfolio" dud is probably down 70% now.

  • Report this Comment On January 30, 2009, at 10:18 AM, pondee619 wrote:

    "This article was originally published on July 22, 2005. It has been updated."

    Quanity over quality seems to be the marching order for fool writers.

    "Tired of these worthless retreaded articles"

    I agree. Cut and paste journalism really doesn't "cut" it.

  • Report this Comment On January 30, 2009, at 10:22 AM, briyan wrote:

    Yet another horrible article.

    "If you had bought stock X in year Y, you would have made Z!"

    Why is that worth the time to read?

  • Report this Comment On January 30, 2009, at 2:00 PM, SteveTheInvestor wrote:

    I couldn't disagree more. I've made numerous sells that actually made me a profit, followed by a significant drop in price for the recently sold stock. Most recently, Bank of America.

    I also disagree with your mention of Alcoa and MMM. Look at the 10 year chart for either one.

    Alcoa has bounced up and down between $20 and $40. It struggled to hit $40 and never stayed for more than a second or two. Now it's at less than the half the price it was in 1999 and down about 80% from its peak of $40. It seems a reasonable assumption that $40 was about the point that it became overvalued and worthy of sale. How many years will it take for you to get back to $40 (a 500% increase)? When it becomes clear that the economy is tanking (who could have missed that?), it's time to sell.

    MMM isn't much better. It's down to about 2001 levels.

    So, we could have spent the last 8 or 10 years holding and gained what? Nothing. In fact, we would have lost money. OTOH, selling when they seemed pricey would have netted a decent profit.

  • Report this Comment On January 30, 2009, at 10:54 PM, sernow wrote:

    I completely agree with these comments.

    1. Never kick yourself for taking a profit. If you have better investment oppportunities eleswhere, take them.

    2. When the circumstances surrounding a company change, selling is often the wisest thing to do.

    3. It's very easy to cherry pick entry and exit points to show wonderful returns in hindsight (a favorite tactic around here), but very difficult in real time.

    4. Bottom feeding is a dangerous game best left to experts with huge risk-tolerance. Usually when stocks are priced for bankruptcy it's because the company has an impaired balance sheet and bankruptcy is a real risk. Instead of a "ten-bagger", you're just left holding the bag.

    5. Investing for the long-term is a sound strategy. Investing blindly is not.

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