Ever fail to sell a stock for a profit, only to watch it tank? You're lucky if you haven't. I just can't believe I watched purchases of Celera Genomics (NYSE: CRA) and Rambus (Nasdaq: RMBS) zoom six, seven, and even eight times in the few months after buying them in December 1999 and January 2000 -- and then held them all the way back, too.

Oh, the agony! Despite having studied investing since junior high -- when I had a three-month summer subscription to The Wall Street Journal delivered to me at summer camp (total nerd) and despite an economics-major father who lectured me throughout my youth on the Crash of '29 and the Great Depression -- I watched in fascination, horror, and paralysis. At least in that respect, I've got good company. In a recent talk at Columbia University, Warren Buffett freely admitted to paralysis when some of his Berkshire Hathaway (NYSE: BRK.A) stock investments, such as Fannie Mae (NYSE: FNM), went bad.

Sure, I had plenty of good rationalizations, and they are reasonable -- short-term capital gains taxes in a taxable portfolio, some thoughts that these companies had world-changing products and might become even larger at some point. They may still. But would it have hurt to have sold a little?

The Rule Breaker Portfolio left a lot of Celera Genomics profits on the table, too. Thinking about those and other profits foregone led to asking for your thoughts on sell rules for the portfolio, and Fools responded. It's a great discussion, and some of it will appear in next week's column.

Truth in sales
To get to the bottom of Foolish selling, I reviewed every trade made by this portfolio and its parent, the Fool Port, since Day One, August 4, 1994. This is easier than you might think. You can find every trade in this real-money portfolio, every buy, sell, short, and cover, explained, documented, dissected. How many financial writers, hedge fund managers, Wall Street sell-side analysts (ha!), and other assorted gooroos share their real-money -- not model or dream or sample -- portfolio history, warts and all, for free, to facilitate learning? If you know any, please post the info on the Rule Breaker -- Strategies discussion board.   

I checked off some decidedly non-Rule Breaker company names. At one time, the Portfolio bought and sold stocks according to the Beating the Dow and Foolish Four strategies. Also, in 2001 we sold Human Genome Sciences (Nasdaq: HGSI) for tax reasons. We bought back shares after 30 days.

The Foolish We
I wasn't a Fool until 1999 and an employee until 2000, but I'll use the time-honored literary convention of the Foolish We. That's because our goal has always been to be investors writing for investors, sharing successes and failures, learning from them, and having a good time doing it.

The two themes that appear repeatedly are selling for portfolio management -- when a position becomes way too large a part of your port ("Portly Peter picked a part of  his port" -- go for it 10 times, you know you want to). That's why in 1997 we unloaded parts of AOL Time Warner (NYSE: AOL), then America Online, and Iomega (NYSE: IOM) and in 1998 reallocated more America Online and some Amazon.com (Nasdaq: AMZN).

The other is to sell when you have a better place for your money. Which begs the obvious question, "What's a better place and how do you know it, smarty?" When I reviewed the sells, I found that the "better place for your money" involved a bunch of helpful tidbits.

A shinier toy?
Sometimes, we sold because we saw a specific stock with greater potential than an existing holding. In 1996, we gave up Gap Inc. (NYSE: GPS) in favor of 3Com (Nasdaq: COMS), and in 1999 dumped laggards 3dfx (OTC: TDFX.BB) and Iomega because we thought that Celera had more potential.

We were so worked up about Celera that we even took another sliver from America Online. Ditto our 2001 slice of Amazon (Nasdaq: AMZN) so we could buy eBay (Nasdaq: EBAY).

Change or deterioration of business
When we said goodbye to Applied Materials (Nasdaq: AMAT) in 1996 and 3Com in 1998, there were no specific buys in mind, but these two businesses hadn't performed well and offered less potential than others we hoped were out there. Business deterioration definitely led to our 1998 departure from KLA-Tencor (Nasdaq: KLAC), when in light of the cyclical downturn in semiconductor business we just knew we could find more return elsewhere. When business just turned bad without the prospects even of an eventual cyclical recovery, we sold Sonic Solutions (Nasdaq: SNIC) in 1995, ejected ATC Communications in 1997, and deep-sixed Excite@Home in 2000.

We bought Excite@Home when it was @Home, the top-dog broadband ISP, but ended up with an amalgamation of lousy acquisitions (failing narrowband portal Excite and BlueMountainArts.com) and equally bad management.

We sold some Amazon in 1999 to fund the eBay purchase and because of Amazon's deteriorating business. We unapologetically wanted to have it both ways: It wasn't performing well, but we weren't ready to give up on Amazon's future possibilities. While Excite@Home and Iomega's potential to change the world had truly ended, we thought it was still there for Amazon.

Things just aren't the same
We expect potentially world-changing businesses to morph, and that's one reason we want good management. But sometimes the business changes so that we don't recognize what we bought -- think Microsoft (Nasdaq: MSFT) operating coffee shops -- and our  reasons for purchase don't hold anymore. We chucked Celera Genomics last month after its parents moved its bioinformation business to its sister company, Applied Biosystems (NYSE: ABI), leaving Celera with almost $1 billion in cash and, well, hopes of a drug-making future.

In bioinformatics, Celera was the top dog with gusto. But as a drug maker, it's just another wannabe, far behind others with more money and drugs in the pipeline. It has tons of cash, but no drugs in trials, and an unknown number in clinical development with partners, if at all. The company may surprise us, but there's no 10x/5y potential -- the opportunity to gain 10 times in 5 years -- here.

Or we don't understand them
We shed Innovex (Nasdaq: INVX) the same day as KLA-Tencor and 3Com, for a reason that we've often considered with any business involving complex technology: to find one "better and easier to track and understand."

There's an argument that AOL Time Warner is no longer understandable, and that it's business may have deteriorated beyond the salvage point. That's my personal opinion, and I'll be the first to admit I don't grok the company. I'd love to be a fly on the wall of Friday's AOL board retreat when the company's alleged new business direction is discussed.

Next week's column will finish the Foolish sale tour, looking at valuation. Until then, stay Foolish! Updated portfolio returns below.

One of Tom Jacobs' (TMF Tom9) sisters won't rest until she's mentioned in this disclosure. At press time, he owned shares of Rambus. To see his stock holdings, view his profile, meticulously prepared according to The Motley Fool's disclosure policy.

Rule Breaker Portfolio Returns as of 5/13/02 Market Close:

          RB       S&P   S&P 
Port 500 500 DA* Nasdaq
Week 3.08%** 2.12% -- 4.69% Month -3.25%** -0.22% -- -2.11% Year -19.28%** -6.40% -- -15.27% CAGR*** since 8/4/94 23.88% 11.58% 13.51% 11.27%

*Dividends added.
**Please keep in mind that these figures will be distorted for the RB Port once a quarter when we deposit $12,500 in new cash. See next note!
***Compound Annual Growth Rate using Internal Rate of Return. This performance measure accounts for the periodic deposits. Total return wouldn't be meaningful, because we started adding cash to the portfolio in July 2001. In a total return calculation, or (Current Value - All Cash Deposited)/All Cash Deposited, cash added shows up as returns.