When Should You Sell?

One of the most common requests we hear from members is "More sell advice, please!" Whether you're a die-hard buy-and-holder, or someone who prefers to sell more frequently, it can be just as important to know when to sell as when to buy.

Today, we're unveiling a new service, Motley Fool Special Opportunities, managed by returning Fool Tom Jacobs. Tom got his start in investing working alongside David Gardner and Motley Fool Pro advisor Jeff Fischer on the Fool's original real-money Rule Breakers online portfolio. Tom has since become a deep-value investor, focusing on micro caps and special situations. Tom considers himself a strategic seller, while David almost never sells. Where do you fall? Share your worst (or best!) sell story in the comments below!

When is the right time to sell a stock?

Tom Jacobs: When you have a better place for your money -- David and I agree 100% on that. But what does that mean?

For me, it means either that my reason for owning no longer works, or the stock is still fine, but something else is better. The latter happens often in down markets, when panicked sellers leave better and better companies for cheap. I say that I don't sell, actually, but switch. When stocks of businesses I know and can value sell off to bargain prices, I'll switch any day.

So that's for a stock by itself. But stocks don't exist in isolation; they are parts of portfolios. If something I own rises to a huge percentage of my portfolio -- 20% or over -- I don't care how great it is. You never have all the information about any company, and information risk is pretty huge when something is that much of your money. So that's the second time I sell.

David Gardner: That's pretty much the way I think about it, too, with the only difference being that I have had stocks run up to well more than 20% of my portfolio. AOL (NYSE: AOL  ) was my huge stock in the 1990s -- I won't say how much, but it was more than 20%. I'm not a nervous investor if I feel like I know the situation well. In general, I've been rewarded -- though given how much AOL fell later on, I would have been smart to sell a portion earlier than I did! That said, I think the key insight I bring is that I believe most people sell winners too fast, to the point that they never get to have the "problem" of a huge winner.

What experiences have influenced your sell philosophies the most?

Jacobs: That's easy. When I first joined The Motley Fool, I was fortunate to work with the Rule Breakers online portfolio team -- David, Jeff Fischer, and the whole wonderful gang.

But no matter how hard I worked, I couldn't escape it: I was no David Gardner. Rule Breaking worked for him and for many others, but not for me. You have to find the strategy that works for you.

So during the 2000-02 crash, I returned to the lessons of my parents, who saw the crash of 1929 and struggled through the Great Depression. Starting with Benjamin Graham -- who began his value investing life after almost getting wiped out in 1929 -- and his student Warren Buffett, I found that value investing fit my personality perfectly. It's served me well ever since -- 181% versus the S&P 500's 39% -- since going all value, all the time. That comes with good years and bad years, by the way. You have to stay strong in the bad times and be suspicious in the good ones. 

Gardner: There are three experiences that come to mind. The first is how I used to invest in my late teens and early 20s. I generally had a target price in mind -- usually not much more than a double for a stock -- and if I achieved that, I would sell. I learned from that that you won't get very rich if you invest that way. You'll end up trading more, and you don't end up looking for real quality. You will never end up buying Cisco or Dell in the 1990s. You won't buy great companies and hold them for 10 years of great appreciation.

The second experience was AOL, which I bought very, very low and held all the way up. My cost basis was about $0.40, and it went up to around $100, and then I watched it fall down to $35, where I finally sold some, and then I think it dropped to around $8. It was still a 20-bagger in five years, but I had a huge win, and I lost a lot of that. It came back to around $20, and at that point, we sold. I think there's something to learn from that -- if a stock rises a huge amount, you just automatically start to sell off small portions of it. Had I done that, I would have been happier.

The third experience was with Amazon (Nasdaq: AMZN  ) , and I'm really glad I held on to that. In the Rule Breaker portfolio, we bought Amazon at around $3, it went to $95, and then dropped all the way to $7. I can imagine some people concluding that buy-and-hold doesn't work. But I kept holding, and Amazon is now at about $120. So I'm really glad that I took a long-term view. You have to suit your holding mentality to the quality of the company. Amazon is one of those flames that will burn brightly for a long, long time. Not many companies are that way, so I can see why it makes sense to sell them after a few years, but for me, that was the most influential sell experience of all -- that I didn't sell, I just stuck with greatness and didn't give up when it was down.

What metrics or indicators do you key in on when considering a sell?

Jacobs: It's 50% numbers and 50% experience and judgment. When I buy, I come up with a range of what a buyer would pay to own the business -- the net present value of future cash flows -- and I want to pay less. This is what value folks mean when they say they want to buy a dollar for $0.50. You get this opportunity when emotion rules, and because emotion can drive prices down, you don't have to know the business value down to the penny. Which is good, because there is no such precision in investing!

When emotion turns from despair to mania, you can sell your dollar, for which you paid $0.50, to someone who will pay more -- and often much more -- than a dollar for it. You don't have to do this very many times to make money. You just have to make sure that you win more often than you lose.

I also sell when I see management investing money worse than I could, paying dividends when they could earn more from paying down debt, say, or buying back shares at expensive valuations.

Gardner: In the most Peter Lynch of ways, I am looking to see if the original view I had of the company -- which is always going to be a positive one given my choice to buy its stock -- has played out. If it has, I probably don't sell unless I think it has played all the way out. What's interesting is when you're wrong, and the market or the company does something different from what you're expecting. There are two cases there: a) it did better, or b) it did worse. If it did better, I'm unlikely to sell! If it did worse, that's when I start thinking about selling.

If Tom is 50% numbers and 50% experience, I'm probably 85% qualitative. The No. 1 reason I don't sell very often is because I truly look for greatness, and I think I find it. Even if things look down for a quarter, or for a year, if it truly is a great situation, I'll hold on. Netflix (Nasdaq: NFLX  ) lost two-thirds of its value in 2008. I didn't sell because this company is the leader in its industry, and I don't see any competition that I'm fearful of.

I primarily sell only when I've lost the belief that that company will win the battle for profits in its industry over the next three years. When I sell, I'm usually selling late. In your strength is your weakness, and selling late is related to not selling and not being willing to sell. I think I gain a lot from taking that attitude. Especially with stocks of mine whose stories don't work out, I can often be the guy who's selling near the bottom.

What's more important when you're selling: the price of the stock or the state of the business?

Jacobs: Both, of course! Price is on the surface, value is below. But if the price is greater than the value I perceive -- and that happens all the time with market emotion -- I'm happy to sell to others willing to pay too high a price.

If the business is ailing, its value is less, and I switch to a better value. If the stock price means others think it's worth more than I do, I'll sell happily. And vice versa.

Gardner: It's not just the state of the business, it's the trends in our culture and new technology. It's what I think will be the state of the business.

What was the best sell decision you ever made? Why'd you do it?

Jacobs: I have to share two!

I sold tiny Key Technology around $30. It dropped eventually into the single digits and today sells in the teens. I was able to take the sale proceeds and deploy them for greater return elsewhere.

But my favorite decision isn't an "oh, it dropped right after I sold!" story. When I owned death-care provider Alderwoods, the stock rose until it was around nine times EV/EBITDA. For its very secure free cash flow but few prospects for growth, buyers were unlikely to pay more for it. I sold on a Friday, and sure enough, the industry leader, Service Corp. (NYSE: SCI  ) , bought it on the following Monday for 10 times EV/EBITDA! Hilarious, because the stock market is never that exact. Ever. It was a nice 70% gain in a relatively short time. People gave me credit for foresight I definitely didn't have and, fortunately, didn't blame me for missing the last few cents.

Gardner: The best sell decision I ever made was when I sold Netflix the very first time. Netflix remains a core holding in Stock Advisor, so this is a stock I obviously like very much today. I first recommended it in May 2003 and the stock had a very nice run from May to November that year. The stock went from $22 to $58 -- more than doubled in a six-month period.

At that point, we interviewed Reed Hastings on our radio show and I asked him about the future. He began describing what to me was too grandiose a vision for his company. I decided that the stock had run a little too fast too early, so I did something very unusual for me and sold a winning position after only six months. As it turned out, Netflix did decline substantially from $58 -- in fact, we rebought less than a year later at $15. So that was probably my best sell. Now it's ironic, because if we had just held that original position, today we'd be well ahead, but we took out the capital and redeployed it elsewhere.

There are very few great sells that I've made. I don't think about selling, and I don't pride myself on selling.

What was the worst?
Jacobs: Keep in mind that I never take the result as an indication that the decision was wrong. You might sell a stock only to see it go up, but maybe you put the cash in a better risk-reward situation. I never look back at stuff like that with regret. You can control your process, not the results.

Yet as always, I do have a story! I owned U.S. Global Investors (Nasdaq: GROW  ) from $17 pre-split into the $40s, and sold, thinking I had just handed off shares to somebody willing to pay way too much. And who can complain about that return in eight months? But it kept on into the $70s! It eventually dropped back well below my buy price, but I still think about those gains on the table.  

Gardner: If you just look at flat-out dollars, it would be AOL. That fall from $100 down to $8 represented a substantial loss of capital. So that was my biggest sell mistake.

A few years ago, I recommended Martha Stewart (NYSE: MSO  ) in Stock Advisor. I felt that Martha Stewart was going to make a comeback as a person and as a company and I made a good recommendation to buy the stock at that time in the single digits. It was the darkest time for her, but I thought the brand had staying power and would recover. We bought around $6 and sold around $9 -- a 50% gain in a year and a half -- but the stock went on to about $35.

If you do the real dollars on that, that sell was far more costly than losing 90% with Krispy Kreme, another Stock Advisor pick. If you assume a $1,000 investment in each, you'll see what I mean. I think people obsess too much about their losers, and they don't think about what selling winners really does. That's where most people lose most of their money.

Name a stock that you wish you had sold, but never did.

Jacobs: In my Rule Breaker days, I owned biotech high-flyer Celera Genomics and like many other shareholders, saw paper gains of over 10 times in three months. Nice, except I rode it all the way up, and all the way down. Oops! I tried to write a piece for David's portfolio on what I learned, and in truth, all I learned was that I wished I'd sold. David was very nice about it.

Gardner: If it's any consolation, Tom, I also gave away all my profits on Celera. That was a real-money portfolio and it was my money.

That was an amazing stock and an amazing time. Celera is one of a number of companies that have been star-shot gainers, either for me or for our community, and that gave it back. I'm sorry to say it's not the only one. Iomega was a stock that went up maybe 20 times in value that we ended up selling for about a triple -- a good return, but we gave away a huge amount on that. And recently, Garmin (Nasdaq: GRMN  ) for Stock Advisor. I think I more than tripled my money and then ended up selling at cost.

For some people, this might be heartbreaking, to make 10 times your money and then sell at a loss or back where you started. It's very frustrating. All I can say is that the good news is that those are not the only times we've made 10 times our money; sometimes we've done that and then gone on to make 20 times our money. I try not to get too emotionally involved with any individual stock. If I watch a stock rise 10 times and then give it back, I think, hey, at least we found something that went up 10 times in value. That's the hardest part. Most people will never do that.

What other advice would you give to readers wondering how to know when to sell?

Gardner: One thing to remember is that you can sell incrementally. I think most people think in binary terms; they're either all in or they're all out. A lot of Fools have started to get that it doesn't have to be that way. You can average in and average out, and for some people who are very emotional, that can take away that edge.

Another thing that you should keep in mind is your overall performance. Over the past 15 years, I have beaten the S&P 500 by 11 percentage points a year, even with the big losers. By holding lots of great companies, like Netflix and Amazon, we still made a lot of money and crushed the market.

Jacobs: Here again, David and I apply different investing strategies, but get to the same result. Averaging out happens for me usually with a winner that really becomes a huge part of the portfolio. Why should I guess at the sell price any more than I might guess at the buy price? But for me, every stock fits in a portfolio, so I'm always looking at it relative to my other holdings.

I will sell completely when market emotion gives me a fantastically great sell price, or when the business changes so dramatically it undermines the investment case. But investing is rarely that obvious, so averaging out is often a great idea for any sale position.

One closing thought -- it's funny how similar David and I have performed -- his 11 points a year for 15 years and my 10 points for seven years, where we've both concentrated on what we do best. Sure, we do things differently: He picks a basket of stocks knowing that the big, technological, world-changing winners will raise all boats, and I use opportunistic value to get to the same result with fewer bust-ups, but also fewer moonshots.

The moral is that there are many ways to get to great outperformance, and in the end, David and I agree that what each of us does works for us, and can for Fools, too!

If you're interested in learning more about Tom's new service, just enter your email address in the box below.

David owns shares of Amazon.com, AOL, and Netflix. Tom owns none of the companies mentioned here. Amazon.com and Netflix are Motley Fool Stock Advisor selections. The Motley Fool's disclosure policy never sells.


Read/Post Comments (21) | Recommend This Article (77)

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 March 09, 2010, at 10:13 AM, dchabino1 wrote:

    I can readily agree with most comments, except that I go only with the first rule I read here: I sell only when the reason I bought no longer applies. I make the assumption that I don't know any better than the criteria I've chosen and don't second guess it order to remain removed and unemotional.

  • Report this Comment On March 09, 2010, at 10:39 AM, henryking54 wrote:

    Before Tom Jacobs was paid a lot of money by David Gardner to sell out his principles and work for the dark side, this is what Tom Jacobs wrote about the Motley Fool:

    "We use our own real money--not model money, trust fund money (we don't have one--rats!) or company money, as some of our alleged competitors such as The Motley Fool use--but money that matters to us and our families. You hurt, we hurt; we gain, you gain. We make money with you, not off you.

    I worked at TMF for 3.5 years during the last crash, and hardly fault David and Tom Gardner for being born well off. They could hardly help it. But their Million Dollar Portfolio could go to zero and not do one thing to their own wealth; "close down that port and start another" when things are bad has been their mantra from the start (just read their books through to see). I hardly fault them for taking VC money either--it allowed them to give me my start in the business--but I do know what taking venture capital can mean to your business and what VC "get big fast" requirements can do to sound investing."

  • Report this Comment On March 09, 2010, at 11:14 AM, goldengirl2362 wrote:

    I'd really like to subscribe to Special Ops, but the price tag is a little bit steep, even with the "discount."

  • Report this Comment On March 09, 2010, at 11:26 AM, goldengirl2362 wrote:

    I'd love to subscribe to Special Ops, but the price tag is out of my budget, even with the "discount".

  • Report this Comment On March 09, 2010, at 5:31 PM, Fordstito wrote:

    " I decided that the stock had run a little too fast too early, so I did something very unusual for me and sold a winning position after only six months."

    It would have been nice if you had shared that with SA subscribers at the time. I only recall glowing comments about Reed Hastings, never a caution.

  • Report this Comment On March 09, 2010, at 6:31 PM, daveandrae wrote:

    It seems to me that the key to successful investing, is not doing anything after you buy.

    In my humble opinion, you should only be buying the kinds of stocks that you would never want to sell. The kinds of stocks your children would still want to still hold long after you are dead and gone. The kinds of stocks that are, indeed, multigenerational.

    The original owners of Coca-Cola sold that business in 1919 for 2000 bucks. Today, it's worth 146 billion. I bought McDonald's back in 2003 for 13.60 a share. Today, my dividend yield to cost basis is 16.17%. Now why would I ever sell out of a stock like that?

    These are just two examples.

    With that said, If a single stock went on such a spectacular run that it became 80-90% of my portfolio then some trimming/diversification would definitely be in order, no matter how high the capital gains tax might be.

    Thomas Edmonds

  • Report this Comment On March 09, 2010, at 6:34 PM, GreenPhotog wrote:

    Enlightning article. Very logical.

    Thank you.

  • Report this Comment On March 09, 2010, at 7:19 PM, MaxTheTerrible wrote:

    First, I'd like to say that I very much enjoyed reading this article and I agree with most points the authors make. However the decision to sell a particular stock will also depend on the type of the stock. For instance, I like to dedicate a portion of my real life portfolio to risky bio/pharma start-ups with good (IMO) potential and with those stocks I have no reservations starting selling once they double in value. Yes, it's true that I might be missing out on the big upside, but the risks associated with these stocks are usually very real and I just treat any "missed opportunity" as the risk not taken.

  • Report this Comment On March 09, 2010, at 8:18 PM, silenceforus wrote:

    I liked this article quite a bit. However, I'd like to add my concerns as someone did above me. You guys suggest buys all day, all the time! But how often do you follow up on a sell for the same stock? I know thats looking like a financial manager of some sort, but still. It'd be nice to know what you guys think of a business later down the road once you've offered up your opinions. Kind of a second look.

  • Report this Comment On March 09, 2010, at 8:58 PM, TMFBritcodeftw wrote:

    I'm one of those Fools looking for 'sell advice' since I haven't actually ever sold a stock although I spend probably too much time wondering if/when I should - so thanks for writing this. Much food for thought on both sides of the coin.

  • Report this Comment On March 09, 2010, at 9:06 PM, TMFBritcodeftw wrote:

    I'm one of those Fools looking for 'sell advice' since I haven't actually ever sold a stock although I spend probably too much time wondering if/when I should - so thanks for writing this. Much food for thought on both sides of the coin.

  • Report this Comment On March 09, 2010, at 11:14 PM, OklaBoston wrote:

    I suspect my score here at MF fell so deeply into negative territory because I got into the habit of paying too much attention to earnings surprises, positive or negative. Since kicking that habit my score seems to be up a lot more often than it's down. Now I'm paying more attention to insider trading info at websites that make it easily available, and wishing such websites paid more attention to what the CEOs are doing than to what mere directors are doing.

    Another thing I'm doing now is using the Scorecard page at MF to figure out as much as I can about what the very highest rated players, those with ratings of 95 or higher, (not just the All-Star 80), are up to.

    I still prefer stocks with relatively few active picks to so-called "Water-Cooler" stocks, for what that's worth.

  • Report this Comment On March 10, 2010, at 12:54 PM, Fordstito wrote:

    Mea Culpa, if there were a retract button I would use it for my previous comment about how SA subscribers were not notified to sell Netflix. David Gardner sent me the link to his sell update from November 2003. http://newsletters.fool.com/18/coverage/updates/2003/11/05/0...

  • Report this Comment On March 10, 2010, at 6:20 PM, CarrieMike wrote:

    The latest offer for "Special Ops" sounds terrific but, as in some other recent offers from The Fool, it is too steep for my budget. When you have a smallish account and want to grow it, paying out that much to get some advice is off limits for me. Why can't The Fool begin services that we could pay monthly or offer a newsletter online that would give such advice but cost one tenth of this expensive program?

  • Report this Comment On March 11, 2010, at 2:49 PM, phyrne wrote:

    oklaboston is doing the same that i do which is looking at the high score players.also when i like a stock i tend to check out who reaped high scores imaterial to the main market and pick other stocks that they bought lately to put into my portfolio.am starting to sell when i get a higher score since my dips are big when market is south.wish i actually bought this stuff but i think nowadays a cash doller is worth 4 since normal mortals especially companies cant borrow anymore.im based in europe

  • Report this Comment On March 12, 2010, at 10:27 AM, bethie30 wrote:

    I loved this article for many reasons. I subscribe to Stock Advisor and Global Gains and indirectly Rule your Retirement. I love reading the different perspectives (of the newsletters and this article). The problem I have been having lately is that each one seems to say that "you should invest in this way." But I am a little value, a little income, and a little global. The last line rang very true to me. Now I just need to (better) adjust my style so that it works better for me.

    Also, I was fortunate to buy several stocks at some low points last year, and others from prior years. I have been wondering what to do with some of these gains. In particular, one stock is a 3 going on 4-bagger. It became about 30% of my portfolio, which made me nervous. I sold some before and I just sold a little more. I like the idea of averaging out. That has worked well for me. It gives me piece of mind. And it gives me cash, so that I am ready when the next great stock comes along.

    I think that this article would be interesting to update and/or ask other Fools for their sell strategies.

    Finally (sorry for the long post) I would have liked very much to join the new service, but the price was just too steep.

  • Report this Comment On March 14, 2010, at 9:02 PM, scs660 wrote:

    I am sorry, but if I owned Amazon at $3 and it went to $95 and I did not sell on the way back down I would question weather or not I should even be doing this. Who looks at that and says "I need to hold on". Why not buy at $3, and hold for awhile and then get out on the way down? Then after the bounce at $7 buy in again at $20 or so "if the company still has the same atributes that made me invest originally at $3?

  • Report this Comment On March 17, 2010, at 6:04 PM, Diamondflooring wrote:

    AAPL

    AIG

    AKAM

    ATVI

    GTCC

    HK

    RAX

    SKNY

    suggestions or comments ? Also any one have any thoughts or suggestions on 3dtv, cloud computing tickers, and minning companies?

  • Report this Comment On March 17, 2010, at 6:35 PM, Diamondflooring wrote:

    I do know cloud computing works by the fiberoptic cables that were put in since the 90s . and now they connect to like 5 or so harddrives the size of skyscrapers. There 2 in cali 1 in maryland and another on east coast and 1 in dallas texas! fiberoptics pic up vibration from over 60 miloes away and so radio wave , freuquencys not sure on that spelling lol. And so on will be picked up y fieroptics and sent to hardrives and then stored or retrieve info from hardrives. So wats being done is certain companys are buying up hardrive space and advertisment space for there company to rent there music,videos,music videos, movie rentals, products and so on. One fiber can send 3 million movie downloads all at once in a second and retrieve the same! we will eventually be paying the companies that own majority of space a monthly fee to have our own hardrive space to store our memmory in and retrieve it without worrying about our personal hardrives getting overloaded, outdated , lost stolen or fried or broke. in other words take for example ur iphone or computer and u r paying for mobile me and ur phone falls in the lake or breaks . u can just grab a new phone n go to ur mobile me or whoever ur renting the cloud hardrive space from and go to ur account and enter password and have everything back to ur new device!! Im not in anyway a computer guy nor expert nor do iknow anybody who have taught me this information. I do construction and dream up inventions every night when i go to sleep but have never got any invention to be patented and so on do to lack of not knowing the right people who know people to help make my inventions take the next step!! Back on cloud computing the Rax and AKAM r definatly 2 companies that own parts of the cloud hardrive space that rent to big companies!! Thanks to montely fool i knew nothing about stocks up until i purshased david and tom montely fool . That got me in the loop and how to think and a guide and great comfort. i was sketchy at first due to past misleads from other people suggestions ! But so far montley fool has been a total help and great adviser! Keep up the good work and stay true to us subscribers and ull find urself blessed with commited subscribers full of ur trust! do onto others as u would want done done u! god bless nu all and thank u Micah Miller!

  • Report this Comment On March 25, 2010, at 8:14 PM, greedwhenfearful wrote:

    Great article! I wish David would have said that when Amazon went from $3 to $95 and then back down to $3 he would have tripled down on his investment. That's one thing I have noticed is these high flyers that come back to earth will eventually be high flyers again if the company is doing everything the original investors thought it would. Stocks get ahead of themselves sometimes and it's a good look into the future.

    Reading about losing all that money on AOL is depressing! I'm glad David is in favor of the "Jim Cramer" approach of scaling out of a position as it moves up.

    Monty

  • Report this Comment On February 18, 2012, at 7:11 PM, jimsweas wrote:

    Thanks for the "when to sell" opinions, but I was looking for something more academic, like what to do with stocks I own (ATAI, COOL, CRR, ESIC, EVR, GENE, NEON, RES, REXX, SSRX) that are down 20-30 points from their buy prices after just 3 to 6 months. I own about 135 different positions in my portfolio. Even though overall I'm up six figures since Jan 1 this year, I'm concerned about how long to hold such laggards that represent about ten percent of my stocks. Any advice?

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