You got to know when to hold 'em, know when to fold 'em,
Know when to walk away and know when to run.
You never count your money when you're sittin' at the table.
There'll be time enough for countin' when the dealin's done.
Kenny Rogers makes it sound simple in "The Gambler," but when it comes to "knowing when to fold 'em" in investing, determining when to sell a stock can be much more difficult than picking a stock to buy. There are many reasons for this; here are a few.
- Emotions. Despite their honest efforts to leave emotion out of investing, investors often find themselves selling too soon based on a knee-jerk reaction to bad news that doesn't change the company's long-term prospects -- or refusing to sell due to an attachment to a stock despite a deterioration of its long-term outlook.
- Anchoring and other biases. As detailed in a series of articles by Fool contributor Brian Stoffel, investors can often be their own worst enemy by focusing on data points that shouldn't factor in investment decisions. If a stock has dropped by 50% in the past year, many shareholders will be thinking, "The stock is so cheap now that it can't drop any more," and, "I'll sell when it gets back to the price I paid." Looking backward instead of forward can be a dangerous mistake for investors.
- Drawback of buy and hold. The benefits of a long-term buy-and-hold strategy have been widely popularized by investing greats like Warren Buffett and Benjamin Graham. Buy-and-hold investing has helped many investing greats achieve staggering success, and it spares average investors from many of the brokerage fees, capital-gains taxes, and other transaction fees that can erode their returns. While this strategy has proven successful countless times, investors' efforts to stay true to this philosophy can keep them from selling when they should.
Brian Shaw has no position in any stock mentioned above. The Motley Fool recommends Dolby Laboratories and Netflix. The Motley Fool owns shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.