"Determining when to sell is one of the toughest issues for investors."

That's the truth, taken from David and Tom Gardner's new book, What to Do With Your Money Now: Ten Steps to Staying Up in a Down Market.

It's a great book not only because they are my employers (Me: "Great shirt today, David!" and "How 'bout them Redskins, Tom?"), but because I challenge you to find anywhere a more honest and soul-searching look at the last few years of the bull market, from people who actually started a company that survived. You have only to look at the titles of the first five chapters:

1. We Were Impatient
2. We Didn't Play Our Game
3. We Didn't Respect Profitability... Enough
4. We Pursued Growth at Any Cost
5. We Failed to Recognize Our Errors

Gulp. How many of us are up to that look in the mirror? Their example urges me to look at the Rule Breaker Portfolio with equal self-searching for possible sales. (And if you want to try an online seminar about the nuts and bolts of evaluating your portfolio for selling, check out our newest and coolest online seminar, Facts vs. Fear, Sell for the Right Reasons.)

When to sell
Tom and David line up nine factors that may lead you to sell a stock. 

  • The reasons you bought are no longer valid.
  • You can't remember why you bought it in the first place.
  • You don't know what the company does and how it makes money.
  • The stock has become significantly overvalued relative to your fair-value price.
  • You'll need the money within just a few years.
  • You've found a much more attractive place to invest your money.
  • You're only hanging on for emotional reasons.
  • You've lost confidence in the company.
  • You hold too many stocks.
  • You hold too few stocks.

First, I'll disregard "you'll need the money within just a few years" and "you hold too many/too few stocks," because it's David's money, and he doesn't need it within the next five years. If you do, take a look at your holdings. Second, we don't think our portfolio is overstocked -- with eight long positions (not counting SPDRs) and two short ones. We can follow that many businesses. Of course, only you know the right number of stocks for you. Give it some thought, and read Selena Maranjian's The Best Number of Stocks, Matt Richey's Defy the Market: Concentrate, and today's Should You Own Just Two Stocks?

Can't remember why you bought it? No Fool gets away with that! We write up a buy, short, or sell report for every stock, so we can simply review our transaction history and match it with today's reality. It helps especially when our memories become a little too convenient. You should, too. Few activities bring the cold, hard kiss of reality to one's cheek so harshly as a review of one's buy or sell rationales.  

A quick review sees no change to our reasons for buying eBay (Nasdaq: EBAY), Starbucks (Nasdaq: SBUX), Amazon (Nasdaq: AMZN), Millennium Pharmaceuticals (Nasdaq: MLNM), LendingTree (Nasdaq: TREE), or for our short positions.

eBay -- a whopping 23% of our portfolio -- continues to grow into the world's largest online flea market, but with big gains in fixed-price sales and business sales. We still see huge potential for eBay's growth, but the catch will be how much of that return it will continue to give away by diluting current shareholders' ownership. Starbucks is on track to turn the world into one big mocha latte and muffin, and promises to reward investors while doing so. Amazon sales are growing, but will their finances survive a consumer slowdown or make up for it by continuing to gain market share? A year ago, we saw enough risk of reduced bang for our Amazon investment buck that we did a King Solomon, selling some and keeping some, reducing our exposure if things go bad but participating in what still could be a success.

Millennium just keeps executing. It made the excellent business decision to buy COR Therapeutics, has two lead drugs with FDA fast-track status, and keeps growing its revenues.

Three less than stellar
Notice I left out AOL Time Warner (NYSE: AOL)Human Genome Sciences (Nasdaq: HGSI), and Amgen (Nasdaq: AMGN).

AOL Time Warner has rewarded us many times over, even after falling from a huge height since the merger. Why did we buy? For information, fun, and time travel, read the original buy report. Those sure were different times, eh? Then go to our Rule Breaker archive and start reading columns from Jan. 11, 2000, around the time of the merger announcement. Finish with Jeff Fischer's recent column, Time to Sell AOL?  Jeff says he wouldn't buy today but isn't convinced to sell.

AOL Time Warner, even after the drop, comprises 17% of our portfolio's current value. I'm not comfortable with that. I've lost much confidence in management, who kept projecting double-digit growth while the business was deteriorating around them. If they did it knowingly, they have some legal questions to answer. If not, remaining execs and new ones hired -- such as new Chief of Online Operations Jonathan Miller from USA Interactive (Nasdaq: USAI), whom we wish very well -- must do much to restore investor confidence.

A possible scenario for AOL Time Warner is that company management gets a grip and pulls off a double or triple, a la Louis Gerstner at IBM (NYSE: IBM). But is that potential -- and the risk that the SEC inquiry and financial issues will turn even darker -- worth keeping the stock? Stay tuned. We're apparently playing Hamlet on this one. Are you? Please tell us in this poll.

Come back next week (and sooner, of course) when we'll continue with Human Genome Sciences, Amgen, and the valuation and better-place-for-our-money criteria. And as for a better place for our money, there may be one that uses biotechnology -- one that's familiar to readers of our subscription newsletter for experienced investors, The Motley Fool Select. Is that a tease? You betcha.

Have a most Foolish week! Updated portfolio returns below.

Tom Jacobs (TMF Tom9) spends his weekends stapling foil insulation on roof rafters. At press time, he owned shares of Millennium Pharmaceuticals and LendingTree. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy. Tom reserves the right to be wrong, stupid, or foolish (small "f"). 

Rule Breaker Portfolio Returns as of 8/26/02 Market Close:

            RB        S&P     S&P 500
            Port      500      DA*    Nasdaq
Week      -2.43%**   -0.29%   --      -0.13%
Month     +5.99%**   +3.99%   --      +4.78%
Year     -24.74%**  -17.43%   --     -28.64%
 8/4/94  +21.49%     +9.43%  +11.29%  +8.51%

*Dividends added. Or, danger ahead. Whatever.

**Please keep in mind that these figures will be distorted for the RB Port for the short period around which we add any cash (see next note!). Since July 2001, we consider depositing $12,500 in new cash each quarter unless we have enough available for new investments without it. 

***Compound Annual Growth Rate using Internal Rate of Return. This performance measure is more meaningful than total return because we began adding cash occasionally in July 2001. In a total return calculation, or (Current Value - All Cash Deposited)/All Cash Deposited, cash added would show up as returns. And that wouldn't be cricket!