Lighten up ... rotate out ... take a little off the table.
Whatever you call it, it means "selling." And selling is 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? 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.
It gets worse and worse and worse
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 nearly 500%. 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? XTO is just one of a handful of energy stocks I scalped for a quick profit in the late '90s -- it's up about 30 times in value since.
"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? 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 golden ticket to lock in a profit. 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 this market. A lot of folks call themselves "market timers" -- and a few actually seem to pull it off -- 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
But the "value" math gets dicey when it comes to selling -- especially with growth stocks, 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'm not surprised that my colleague Bill Mann and the team at Motley Fool Hidden Gems (more about these guys just ahead) have led me to 20 stocks that doubled over the past five years, including a 500% gainer.
They work hard and stick to the fundamentals. Plus, they're fishing a rich pond. Wall Street isn't snooping around most of these stocks yet, which creates inefficiencies and pent-up demand.
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 service to lead me to undervalued small caps with big potential. From time to time, the team tells us to sell, but I 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. But then you pull up chart after chart of "boring" old stalwarts -- forget my little XTO, check out massive Chevron
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, but the long-term trend is higher. So tell me, how do you lose money in the market? Well, you either buy at the top in 2000 -- and only at the top in 2000 -- 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 alone, at your own peril.
You don't have to go it alone
OK. Enough preaching. Like I said, when you join forces with a stock-picking outfit like Hidden Gems, smarter investors than I will tell you when to lock in your gains. But remember, the choice is yours.
And when the Hidden Gems guys tell you to buy, you'll want to listen. After all, as of today, their recommendations are up 23.4% on average. That's compared with a 1.7% loss if you'd bought the S&P 500 instead. Are you earning returns like that?
If you're not, you should consider taking a free 30-day trial of Hidden Gems. That way, you can verify everything I've just told you without risking a penny. But whatever you decide, just promise me you won't get too cute. For a peek at Bill Mann’s five top picks for new money now, and to find out more about a free trial, click here.
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. Paul owns shares of Coca-Cola and Anheuser-Busch. Coke and Home Depot are Inside Value recommendations. eBay and Amazon.com are Stock Advisor picks. The Motley Fool is investors writing for investors.