Lighten up ... rotate out ... take a little off the table.
Whatever you call it, it means "selling." And it's tricky. So before you pull the rip cord, ask yourself this:
"What if I had never sold a stock?"
Would you have more money now, or less? The answer might surprise you. I set out to answer that question myself this morning, but 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 a precise figure, because I knew that once I saw it for myself, I'd go mad.
Let me tell you a secret
I bought eBay
Think about it. "I sold eBay back in 1998" is one of the most sickening things you'll ever have to admit to another investor. Since that first double, eBay is up another 300%. I didn't flip Amazon.com
But you can bet somebody did, and I know a little how they feel. Ever hear of an oil and gas exploration outfit called XTO Energy? Along with Transocean
"So what did you do with the cash?"
How should I know? I probably bought another stock, but do you think it did as well as XTO Energy? Fat chance. I know I didn't have a better stock in mind when I dumped it. I don't recall buying a house or furniture, either. (You'll see how this is relevant before we're done, believe it or not.)
No, I sold my meal ticket to lock in a profit. That might sound good in times like this, but what did I really "lock in"? Zip. You never do, unless you pull your profits straight out of the market, which is not something I think you should consider now, especially if you're in your prime investing years like I am.
That's right. Tempting as it is, I don't think you should try to time the market. A lot of folks call themselves "market timers" -- and a few actually seem to pull it off, at least in hindsight -- but not 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, not when it comes to selling. Sometimes a stock gets so cheap you have to buy it. I remember this one guy here at the Fool banging the table on Home Depot
Need a more current example? How about Coca-Cola in 2006? Despite solid sales and earnings growth, the stock treaded water for years -- before the value guys moved in, me included. It ran up some 50% in 18 months before settling back.
Could I have cashed out? Sure, but for me, the "value" math gets dicey when it comes to selling -- especially with solid companies, and especially winners. The fact is, I've met some great stock pickers in my day, but very few great sellers. Come to think of it, I've never met a great seller.
Promise me you won't get too cute
That's why I wasn't surprised to hear that my old pal Andy Cross and his partner Seth Jayson are imploring their Motley Fool Hidden Gems subscribers to stick with this choppy market. They work hard, have a long-term focus, and stick to the fundamentals.
Plus, as small-cap value investors, they're fishing a rich pond. More than ever, Wall Street isn't snooping around these lesser-known stocks, which creates inefficiencies and pent-up demand, as I learned with XTO Energy in 1998. Plus, it's fairly well known that smaller companies (and their stocks) tend to lead us out of recessions.
But just so you don't write me off as a cheerleader, I'll let you in on a secret: I use the Hidden Gems guys to lead me to undervalued small caps with big potential. From time to time, they tell me to sell, but I typically don't listen -- and I probably won't in the future. Especially not if it's a winner. I never sell on valuation.
That's how tragedies happen
After all, market timers tell you that buy-and-holders like us get wiped out in bad markets (again, easy to believe on days like these). But then you pull up chart after chart of "boring" old stalwarts -- forget my little XTO Energy, check out massive Chevron
So how on Earth did anybody ever lose money on stocks like that? Good question. Know what else looks like that?
The Dow or the S&P 500 -- aka the market. Granted, when you zoom in, the ride gets bumpier, especially in times like this. But step back, and the long-term trend is higher. So how do you lose money in the market? Well, you either buy at the tops -- and only at the tops -- or you get cute and buy and sell along the way.
Consider this instead: Sell your stocks when you want to buy a house, furniture, or make another major purchase. Sell when you have too much in stocks and you want to buy some bonds, gold, or collectibles. Sell when you have too much in any one stock. But sell a stock, or a dicey market like this one, on valuation or fear, at your own peril.
OK. Enough preaching
Like I said, when you ask for help from a stock-picking advisory service like Hidden Gems, much smarter investors than I will tell you when to lock in your gains. But remember, the choice to sell is always yours. And right now, I'm not selling.
Quite the contrary, I'm biting the bullet and buying this market. So are my colleagues Andy Cross and Seth Jayson. You see, not only are they recommending small-cap value stocks to their subscribers, Andy and Seth are investing, too. Just last week, they announced their intentions to buy three small-cap gems with real money.
If you'd like to see exactly what they're buying -- and even get in ahead of them -- here's how to do it: Simply take a free 30-day trial of Hidden Gems right now. You'll see at once the three stocks Andy and Seth are going to buy for their real-money portfolio.
Then you can take a whole month to check out the members-only website and verify everything I've just told you without risking a cent. But whatever you decide, just promise me you won't get too cute.
For a peek at the first three stocks the Hidden Gems team will buy for their new real-money portfolio, and to find out more about taking a no-risk free trial, click here.
This article was originally published July 22, 2005. It has been updated.
Fool writer Paul Elliott owns shares of Coca-Cola. Coke, eBay, and Home Depot are Inside Value recommendations. eBay and Amazon.com are Stock Advisor picks. The Motley Fool is investors writing for investors.