Lighten up ... rotate out ... take some profits.
Call it what you will, but it all means "selling." And it's tricky business. So before you reach for the rip cord, 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 for myself this morning and to back it up with some hard data. I chickened out.
Heck, I already knew the answer. If I'd never sold a single share of stock, I would be ... richer than I am today. How much richer? Much richer. I'd give you a precise figure, but, like I said, I chickened out. I knew that once I saw it for myself, I would scream.
It gets worse, and worse, and worse
I bought Microsoft (NASDAQ:MSFT) back in 1987. I sold it the next year for a quick double. OK, that's not exactly true. In fact, it's a lie. It is, however, one of the most sickening things I can imagine having to say to another investor.
I didn't flip Dell (NASDAQ:DELL) as a small cap, either. But I know a little how it feels. Pull up a five-year chart for Pulte Homes, and here's what you'll see: a steady ramp upward, connecting $5 to the ... top of the freakin' world. (OK, to just about $50, but still.)
You guessed it. I bought Pulte at around $5 and sold it a year or so later for around $8. Today it's around $43 (even after a recent sell-off). That, my friend, is what I call the most painful 60% profit of my career.
"So what did you do with the caaash?"
How should I know? I probably bought another stock. Though do you think it did as well as Pulte? I know for a fact I didn't have a better stock in mind when I sold it -- and that I didn't buy a house or even furniture. (You'll see in a moment how this is relevant, believe it or not.)
I sold my meal ticket for no other reason than to lock in a nice gain. But what did I really "lock in"? Zip. You never do unless you pull that money straight out of the market -- which is not something I think you should consider, especially if you're in your prime investing years.
That's right, I said it. 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 -- at least for a while. But it's not for me. In fact, you might want to brace yourself, because I'm going to go one giant step further than that.
I barely believe in valuation
At least when it comes to selling. Sometimes a stock gets so attractive you have to buy. Altria (NYSE:MO) back in 2000 (when it was still known as Philip Morris) comes to mind. Or Halliburton (NYSE:HAL) a few years later. But the math gets dicey when it comes to selling -- especially growth stocks, and especially big winners.
How about a funny story? Two years back, I asked Tom Gardner -- you'll hear more about Tom and his band of investors in a bit -- to recommend the one stock I should buy for my IRA. "I love Moody's," Tom replied, "but it's a little pricey at these levels." I bought it that instant. (It's up about 100% since and is still hitting new highs.)
What was I thinking? It's simple: I'll take a company a great investor absolutely loves over a "bargain" any day. If that same investor tells me the stock is "a bit pricey at these levels," I love it that much more. 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
I'm not surprised that Tom and his crew at Motley Fool Hidden Gems have picked half a dozen stocks that have more than doubled in value over the past two years. They stick to the fundamentals. Plus, they are fishing a rich pond. Wall Street isn't snooping around these small caps yet, and that creates inefficiencies and pent-up demand.
But just so you don't call me a Hidden Gems cheerleader, I'll let you in on a secret: I use Tom Gardner's service to find undervalued small caps with big potential. From time to time Tom tells you to sell, but I typically don't listen -- and I probably won't in the future. Not unless the story is really broken. And certainly not if I'm sitting on a winner. I never sell on valuation.
That's how tragedies happen
One day, you find yourself chatting stocks, and some fellow says something like, "Yeah, but lots of folks get creamed in bad markets -- even on great stocks like American Express (NYSE:AXP) and Disney (NYSE:DIS)." But when you look at their long-term charts, it's a gentle slope skyward. So tell me, how on earth did anybody ever lose money on those stocks?
Know what else looks like that? A chart of the S&P 500 -- a.k.a. the market. Granted, when you zoom in, the ride gets bumpier than it appears on a 30-year graph, but the long-term trend is upward. So, how do you lose money in the market? Well, either by buying at the top in 2000 -- and buying only at the top in 2000 -- or by getting cute and buying and selling along the way.
Consider this approach instead: Sell your stocks when you want to buy a house or furniture. Sell when you have too much in stocks and you want to buy some bonds, gold, or collectibles. Sell if you have too much in any one stock. But sell a stock, or the market, on valuation at your own peril.
The little picture
Like I said, when you join a service like Hidden Gems, smarter investors than I will tell you when to lock in your gains. The choice is yours. But when Tom and the gang tell you to buy, you want to listen. After all, as of Nov. 27, 2005, the stocks recommended to subscribers are up 31.2% on average. That's compared with a respectable 12.5% if you'd bought the S&P 500 instead.
Are you earning returns like that? If not, you're in luck. Tom is offering a special free trial to Hidden Gems right now. Take him up on it, and you can check out everything I've told you without it costing you a cent. Whatever you decide, just promise you won't get too cute. Click here to find out more.
This article was originally published on July 22, 2005. It has been updated.
Fool writer Paul Elliott promises to keep you posted on Tom Gardner's progress at Motley Fool Hidden Gems. All picks and results are posted on theHidden Gems website. Paul owns shares of Moody's but no other companies mentioned. Moody's and Dell are Motley Fool Stock Advisor recommendations. Microsoft is a Motley Fool Inside Value recommendation. The Motley Fool isinvestors writing for investors.
