When to Sell
This is often one of the most difficult issues for investors. If you sell a stock too early you may miss a company’s biggest run-up. Antithetically, if you sell too late you could suffer from huge losses. When is the proper time to sell?
The most important thing that will guide you to sell or hold a stock is changes in the story. Even in the best of run companies there are always temporary mishaps, but if there are adverse changes in the story, then it may be time to sell. Also, if a stock changes categories it might be time to sell.
At StockBoxFinancial, we like to think of selling the business rather than the stock. We only like to sell a business if the story changes and rarely sell due to changes in the price of a stock.
First, let’s look at why we usually don’t sell a company due to the price of a stock. Suppose we invest in a company and the story works out favorably and there is a large increase in the stock price to the point where the stock may be overpriced. At this point, especially if the stock is a fast grower, we almost never sell. First of all, if we sell then we have to pay a sell commission and taxes on our gain. Hence, any extra profits that are made by our wise sell will be negated by taxes and commissions. Also, if the company is a great firm when do you buy back in? For these reasons we almost never sell due to a change in price.
Knowing when to sell is directly related to your understanding of the business. The better you comprehend the firm’s business model the better you’ll know when to sell. We believe that you should sell when the story changes for the negative. This means that you have follow the story even while you own the stock. Every six months or so you should read the last quarterly report and read all the latest news stories about the company (these can be found on Yahoo Finance). If the story works out as well as or better than you expected then you should keep your current shares and consider adding more. On the other hand, if you don’t like where the story is going it may be time to sell.