Lighten up ... rotate out ... take a little off the table.
Whatever you call it, it all means "selling." And selling is 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.
I already knew the answer. If I had never sold a single share of stock, I would be ... richer than I am today. How much richer? Much richer. I can't give you the precise figure because once I saw it for myself, I knew I would scream. How about you?
It gets worse, and worse, and worse
I bought Cisco (NASDAQ:CSCO) back in 1990. I sold it the next year for a quick double. OK, that's not exactly true. In fact, it's an out-and-out lie. It is, however, one the most sickening things I can imagine having to say to another investor.
I didn't buy and sell Oracle (NASDAQ:ORCL) as a small cap, either. But I know a little how it feels. Pull up a five-year chart for Pulte, and you'll see a steady ramp upward, connecting $10 to the ... top of the freakin' world. (OK, it only hit around $100, but still.)
You guessed it; I bought Pulte at around $5 and sold it a year or so later for around $8. Now it's somewhere around $40 (and maybe a bargain!). 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 sure didn't have a better stock in mind when I sold it -- and I don't recall buying a house or even furniture, either. (You'll see in a moment how this is relevant, believe it or not.)
No, 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 right out of the market -- which is not something I think you should consider now, especially if you're in your prime investing years.
That's right. 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 -- 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 cheap you have to buy it. Bank of America (NYSE:BAC) and Citigroup (NYSE:C) in 1991 come to mind. Or my nemesis Pulte and rival Centex (NYSE:CTX) back in '98. But the math gets dicey when it comes to selling -- especially growth stocks and especially winners.
How about a funny example? Two years back, I asked Tom Gardner -- we'll talk more about Tom and his Motley Fool Hidden Gems in a bit -- for the one stock I should buy for my Roth 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.)
What was I thinking? It's simple: I'll take a company a great investor absolutely loves over a cheap stock any day. If that same investor tells me the stock is "a bit pricey," I love it that much more. The fact is, I've met some great stock pickers in my day, but only a very few 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 the least bit surprised that Tom Gardner and his Hidden Gems crew have picked half a dozen stocks that have more than doubled in value over the past two years. They work at it and stick to the fundamentals. Plus, they are fishing a rich pond. Wall Street isn't snooping around small caps yet, which creates inefficiencies and pent-up demand.
But I wouldn't want you to think I'm a Hidden Gems cheerleader, so I'll tell you a secret: I use the service to lead me to undervalued small caps with big potential. From time to time Tom will tell you to sell, but I don't listen -- and probably won't in the future. Not unless the story is really broken. And not if it's a winner. I never sell on valuation.
That's how tragedies happen
One day some stock jock will tell you something like, "Yeah, but lots of people lose money in bear markets -- even on money-makers like ExxonMobil (NYSE:XOM) and GE (NYSE:GE)." But when you look at their long-term charts, it's a gentle slope skyward. So how on earth did anybody ever lose money on those stocks?
Know what else looks like that? The S&P 500 -- a.k.a. the market. Granted, when you zoom in, the ride looks bumpier than it appears on a 30-year graph, but the long-term trend is skyward. 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 great thing is that the choice is yours. But when Tom and the gang tell you to buy, you want to listen. After all, as of December 28, 2005, the stocks recommended in Hidden Gems are up 32.9% on average. That's compared with about 11.1% 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 (you can even download the full write up on every single one of his picks).
Whatever you decide, just promise you won't get too cute. Click here to find out more taking a free trial.
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(all yours with a free trial). Paul owns shares of Moody's and Bank of America. Moody's is a Stock Advisor recommendation; Bank of America is an Income Investor pick. The Motley Fool isinvestors writing for investors.
