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.