Stock Market Investing: Knowing When (and when not) to Sell

One of the greatest challenges of investing in stocks is developing a "sell discipline". Some of the most adept investors struggle with the decision of when to sell.

First, recognize that there are no absolute formulas to tell us to sell at precisely the right time. Instead, we'll need to consider a bundle of factors such as the investment's characteristics, the broad economy, and your own needs, with an eye to market trends. The answer will come from some combination of these hard-to-quantify characteristics.

If you'll need cash soon, for whatever reason, you should be more ready to sell, especially if a stock becomes less of a sure thing. Similarly, if the economy is weak, we might be more motivated to take profits (or even losses) in stocks which are sensitive to economic swings, while a strong economy might allow us to hold tight.

Most important, however, is the intrinsic value of the stock itself. A simple rule plays out here: buy when a stock is under-valued (when the stock sells for less than its intrinsic value), and sell when it is over-valued (priced above intrinsic value). The trick is measuring intrinsic value, which can be done many different ways. We'll talk about measuring intrinsic value more at another time, but regardless of how we measure it, we had to have an idea of what the company was actually worth when we bought it. So, if we reach that target, we can start thinking about taking profits. It isn't always necessary to sell out immediately, though. For a pure value stock, we should sell somewhere in that range, but if the company is expected to grow, we can wait longer and take advantage of that growth. Perhaps, as a rule of thumb, wait until the stock reaches a price double what we think it's worth. Of course, this is a personal decision, too, and depends on how patient you are, and how much you have invested. At this point, the "easy money" has already been made.

Market Trends. It is our firm position that market trends alone should never lead to buying or selling a stock. However, if we've already decided to sell, trend indicators, used carefully, can enhance profits. For example, if a stock is in a solid uptrend that shows no signs of slowing, it may be profitable to wait for the stock to approach a short-term top before selling. Beware that you don't hold too long. Better to sell early than late. Eventually the market will catch on to reality, so if your evaluation of the stock is right, the risk of holding on too long can be far greater than the small benefit from holding out for that extra dollar.

A few other errors to avoid:

Don't avoid selling because you're emotionally attached to a stock. Circumstances change over time. There's no reason to beat yourself up over it. Just dump the loser and move on.

Don't sell when panicked. Panic is an emotional response, and usually wells up when things aren't going your way but you can't tell why. Know why you want to act. Until you can make a judgment about why to sell, it's probably best to hold on and wait out the fear.

Don't sell when worried. In many ways, worry is similar to panic, if a bit milder. It is still an emotion, and one that should be controlled. Stocks are often said to "climb a wall of worry", which means that they will ease upward through difficult times. When news is worrisome, but not devastating, the only remaining catalysts are good things, as all the bad news has probably already been factored in by selling among the worrywarts.

Don't sell when bored. Just because a stock isn't moving doesn't mean it was a bad selection. It may just indicate that you're smarter (and therefore earlier) than the market hordes. If you're still convinced it was a good choice, hold firm and wait for everyone to catch on to your wisdom. Especially with value stocks, it can often take a year or longer before the mainstream recognizes a good stock, and that's when the price will start moving. Patience is a virtue.

In the end, every selling decision is a personal one, and must balance out all the factors we've mentioned. The most important rule, of course, is to sell when it benefits YOU.

To send comments or to learn more about Scott Pearson's Investment Management Services, visit http://www.valueview.net

Scott Pearson is an investment advisor, writer, editor, instructor, and business leader. As editor and publisher of Investor's Value View, a national investment newsletter, he provides general money tips and investment advice to readers, and demonstrates a special knack for locating the up-and-coming stocks in the burgeoning high-tech industries. As President and Chief Investment Officer of Value View Financial Corp., he offers investment management services to a wide variety of clients.

---

How Covered Calls Turned a Trader Around

Sidney felt sick as she looked at her latest OptionsXpress... Read More

How to Make Big Money Safely in Stock Market

(1) Stock Market is Tough Place to Make Any Money... Read More

Is Active Trading The Answer?

One of the main reasons many of us get into... Read More

Planning Your Dive and Diving Your Plan ? Trading!

A colleague of mine just returned from a scuba diving... Read More

Prospering with Mutual Funds: How Anyone can ?Afford? an Investment Advisor

Recently I was invited to appear on a live CNNfn... Read More

Discover the Retirement Breakthrough the Federal Government Created for You - The Roth IRA!

If you don't know what a Roth IRA is then... Read More

Stops Make Money

During the day I watch CNBC-TV, the stock market channel.... Read More

Using Sector Funds to Construct Diversified Mutual Fund Portfolios

'Sector funds are too risky.' 'I doubled my money with... Read More

The Stock Market - Part 1: Believe It Or Not, Its Always Been Your Best Friend And Always Will Be

Regardless of the fact that the world's stock markets have... Read More

Market Timing?

The recent criminal fiasco in the mutual fund industry is... Read More

Dont Fight The Fed

One of the great truisms of Wall Street is "Don't... Read More

How to Evaluate Load vs. No Load Mutual Funds

If you have been dealing with mutual funds for any... Read More

How (NOT) to Buy Mutual Funds

When it comes to mutual funds, there is a lot... Read More

Basics of Stock Market

Financial markets provide their participants with the most favorable conditions... Read More

The Golden Goose is Sick

It is finally catching up with them. The brokerage companies... Read More

Market Success

Who are the successful investors?There are those who follow the... Read More

The Stock Trading Plan - Why You Must Have One To Trade Successfully

This is the continuing story of our two imaginary traders,... Read More

Acapulco - The Stock Market Dives

There is a famous cliff on the ocean in Acapulco... Read More

Emotional Trading

The single most expensive stock market trades are those made... Read More

Gold Fever

Right now there doesn't seem to be any "gold fever".... Read More

Economists #2

Economists know more about how the fragments of society work... Read More

Making a Stock Watch List

I am taking the time to help others learn the... Read More

Prosperity

It has fallen upon the consumer to make our economy... Read More

Race Horses and Mutual Funds

For years investors have been taught to look into the... Read More

A Good Fund Manager

Every Wall Street analyst, financial planner and broker will tell... Read More

Tips to Finding Other People?s Simple Trading Plans

Did you know you can make money (and a lot... Read More

Stock Chart Reading

As an investor you will want to check out any... Read More

Bull or Bear?

Cat or dog? Maybe Zebra. Shucks, I don't know, but... Read More

Stock Market Volatility

In my opinion, due to the volatility of stock market... Read More

The Secret to More Winning Trades is as Simple as Avoiding This Common Mistake

If you're a normal human being, your need to feel... Read More

How to Short Stocks? How to Make Money when Your Stocks Go Down by Shorting

The stock market can present you with a lot of... Read More

Index Fund Trading Using Technical Analysis and Swing Trading Strategies

Index Fund Trading can be one of the most profitable...or... Read More

Stocks & Oil, Sat Jun 18th, 2005

Both the stock market and oil prices rallied recently, which... Read More