"When should I sell?" is one of the most popular investing questions. It's a lot harder to answer than "When should I buy?" We worry we'll sell too soon, leaving potential profits on the table. We worry we'll sell too late, perhaps after a 20% pullback from an all-time high. We make decisions based on emotion -- for example, selling in a fit following a bad earnings report.
I'm as guilty as the next guy of making selling mistakes. But I'm learning not to outsmart myself. I'm going to let you in on my never-before-revealed 2006 New Year's resolution: I will not sell a share of stock this year (and perhaps beyond).
Why on earth would I do such a thing, you ask, and wouldn't it have been easier just to lose 10 pounds?
My tales of woe
I made my resolution because my selling decisions have cost me a lot of money. Here are three examples:
I used to own funeral-home operator Alderwoods Group
I had not one, but two chances to hold UnitedHealthGroup
Not so much. If I hadn't sold the UnitedHealth shares issued to me, I'd be sitting on near doubles since the acquisitions. No commissions paid. No smiling tax man.
One more. Electronic medical record systems provider Quality Systems
Midway through 2005, I became concerned with the company's valuation. I sold call options on the stock, trading the future upside of the stock price for some up-front cash. The risk was that the stock would continue to run, and I'd lose my shares for far less than the market price. Guess what happened? Even though Quality Systems is 27% off its high, it's still 22% higher than when I was forced to sell.
You own shares in a nice little business. You've got a nice gain. You're hearing "Don't be greedy! Don't you know pigs get slaughtered?"
Someone close to me was gifted Starbucks
The Foolish bottom line
To be sure, there are often good reasons to sell: A loss of faith in management or a valuation that goes completely bonkers, to name two. On the valuation front, think Cisco Systems
This all leads me back to my resolution. I add new money every month to my portfolio, and now I'm going to make sure I hold my buys for a good long time. After all, I won't buy a stock unless I'm very sure of its long-term prospects. There's no reason I shouldn't benefit from all those years for which I take the time to project the company's cash flows.
This long-term, buy-to-hold strategy is also what Tom Gardner and Bill Mann recommend to their Motley Fool Hidden Gems community members. Together, we're buying great companies we can hold long-term, and we're already beating the S&P 500 by nearly 25 percentage points.
Reasons to sell may come, but they are few and far beween. Particulary when you have a portfolio of true jewels. Click here to learn more.
Fool contributor Jim Gillies is part of the Hidden Gems team, searching out tomorrow's best small caps today. He does not own shares of any company mentioned (because, you know, he sold). UnitedHealth Group and Quality Systems are Stock Advisor recommendations. Alderwoods Group is a Hidden Gems recommendation. Send Jimfeedback!
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