When to Sell a Stock (Updated Version)

Jul.02, 2007 in Market Outlook

Deciding when to sell is just as important as deciding which stocks to buy in the first place. The refusal to sell, whether it’s due to unrealistic expectations, stubbornness, lack of interest or mere inattention, is the undoing of many an investor.

As a long-term investor, you don’t want to cash in every time your stock moves up a few percentages. Commissions and taxes would cut into your gain and, besides, you’d have to decide where to put the proceeds. By the same token, you don’t want to bail out in a panic in the aftermath of a market plunge.

Brokerage houses’ research departments are slow to issue sell signals unless a company faces serious problems. When analysts get uneasy about a stock, they often equivocate with phrases like “weak hold.” You should take that to mean, “Don’t buy any more shares and if you’ve got a profit, seriously consider selling.”

How to Tell When to Sell

Here are some clues that it is time to consider selling a profitable stock no matter what the analyst’s report says.

The Fundamentals Changes.
If the company’s fundamentals start to weaken, it’s time to reconsider your investment. An example might be a fast-expanding retail chain whose sales per store, after rising for years, suddenly decline. Maybe the profit margin has slacked off after a series of consistent increases. These problems could signal that the business has peaked.

The Dividend is Cut. The progression and security of its dividend are important to any stock’s prospects. A dividend cut or signs that the dividend is “in trouble”-meaning that analysts or creditors are quoted as saying they don’t think the company can maintain its payout to shareholders- can undermine the stock price.

You Reach Your Target Price.

Many investors set specific price targets, both up and down, when they buy a stock; when the stock reaches the target, they sell. Such guidelines can prompt you to take your gains in a timely fashion and to dump losers before the damage gets too painful.

How the Pros Decide to Sell

Over the year we have asked successful investment professionals how they decide that it’s time to sell a stock. Here are some highlights of what they’ve said:

Sell in Stages As the Price Goes Up.

The chairman of a family of funds: “Almost of all stocks move in two-steps-two years of appreciation, two years of digestion, two more years of growth. So after a run-up in price, we sell 50 percent of out position, even though we may be investing for a longer term, and let the other half run.”

Sell When Momentum Slows.

The stock portfolio slow, we sell.” As an example, he cited a major shortage of liability insurance that once sent premiums soaring: “In this litigious age, people don’t go without insurance. So the sales and earnings of major casualty insurance companies swelled-and continued for about a year and half. Then growth in revenues and premiums slowed and we sold them all.”

Sell When the Grass is Greener Elsewhere.

The chairman of an international group of mutual funds: Sell when you’ve found something better. We sell a stock to buy one that shows better potential for appreciation. We used to sell a stock to buy another that we thought had 30 percent more potential. We did not reach our goal of being right two-thirds of the time, so we changed our criterion to 50 percent. Let’s say you own a $10 stock that has an appraised value of $20. Then you find another $10 stock with a $30 value-50 percent better than the first one. That’s when we sell the first stock.”

A Note of Caution

Fund managers and other professional investors are by the nature of their work more active traders than individual investors should be. We present their comments because we think they can provide some insight into the professional’s mind and methods, not because we think you should emulate their behavior.

By Kiplinger

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