When We Sell

Nov 22, 2006 by

Last week, I mentioned how David Mallach felt that the most important part of investing was determining the right time to sell. When is the right time to sell, and how do we determine when that time has been reached? I asked ten people on mturk.com, and received the following responses.

I only take small trips into the stock-trading world, and for me, it was really all about the bottom line. I picked stocks based on their analyst ratings (1-5,) and calculated the price I would need to sell at to make the amount of money I was going for. When I first started, I had attachments to certain stocks because of relationships I had to the companies (places I had worked or services I had used,) but eventually I just liked the challenge of buying and selling at just the right time to maximize profit.

I normally evaluate where I think a stock is headed to serve as the framework for my sell decisions.

For instance, I’ll pay attention to the stock’s 1 year chart at least two times a week- and consider selling if that stock is at a top that repeatedly has not been surmounted for that last year. I’ll look at the sales volume of that stock as it crests the short-term top to see if it’s similar to volume at other tops- or it’s notably increased- indicating a possible blowing up through that near-term top.
Of course I would ride the stock if I think it’s finally breaking through the top rather than just meeting it and falling.

Besides chart watching, I’ll sell a stock if I’ve made the profits I’ve anticipated from that equity during the time I held it- takings profits is never a bad thing!
Or I’ll dump a stock that’s just a chronic lagger and doesn’t even move up in tandem with the broader markets.

I compare the dividend yield (dividend/sock price) with the return I can receive in a Money Market account. I sell stocks that pay less than a money market account.
I keep stocks that pay more than a money market account. I will not follow this rule if I have strong evidence that the stock will appreciate significantly. I rarely have this type of evidence so I almost always base my decisions on dividend yield.

I sell a stock when I need the cash which is related to the reason why I buy stocks. I buy a stock when I have spare cash to do so. I very rarely sell a stock at a loss so if it doesn’t do well I’ll hold on to it until it does. If it reaches the point where it’s lost so much that there’s not much to gain from it, it’ll stay in my portfolio possibly forever. I have never sold a stock at a profit that didn’t go much higher afterwards. The way interest rates have been, unless you’re a senior citizen, stocks are the only way to make a decent rate of return.

When deciding to buy or sell stocks i always think of what season the year is in. For example i would buy toy companies stocks in december for the single reason that christmas is in december. however i would probably purchase the stock in early novemeber since most manufactuers and production comapanies stock up on supplies early. Another month to purchase stocks would be may or june because many people are purchasing extra things for summer ex clothing, swim suits

Before making the decision to sell a stock, I examine the performance of the stock over a given time period – 6 months to a year. I also take a look at the company’s holdings’ and carefully examine their cash reserves and their long term and short term debts. I also look to see if their long term goals are comptatible with their past and recent performances. Then I look at how much the price of the stock has fallen and/or risen in the past few months. Then I determine if keeping the stock is in my best long term financial interests.

Interestingly enough, there is no one right answer for this question because I sell different stocks for different reasons at different times. Some times I will sell a sotck because if news that I hear in the media. If I feel that news will negatively impact the future of the company, I may unload that stock to try and get rid of it in advance of that news’ actual impact. At other times, I may unload a stock based on nothing more then a gut feeling about where the market is going to go as a whole. Or I may come across some idea about a stock that changes my perspective on the industry that the stock is in. If I think the stock is in a sector that is likely to run into hard times going forward to to changing public demand or perceptions, I may unload a stock for that reason.

However, a big factor in selling any stock is trying to do so before the rest of the crowd figures out that the stock is no longer worth holding. You always want to be very forward thinking in your sell decision. You never want to be the last rat off of the ship so to speak. If I am ever worried that public sentiment is going to turn against a stock for some reason in the future, I always want to be the first person to sell that stock, not the last one. And, you never want to try and sell into a falling stock price/trend. You may be able to get out of that stock, but you will surely loose any gains you may have realzed if you have to sell it at the market price. You can absolutely get robbed if you have to do that to get out of a position. If you wait until then to sell, you have waited far too long. Better to get out of a stock with a profit (any profit) then to be stuck holding a dog you either can’t get rid of at the price you want or can’t get rid of without taking a big loss.

My advice is this. Unless you can make very good arguement for why you think you should be holding that stock for whatever time frame, sell it and take your profits off the table. There are just too many other good stocks out there to put your money in. Be in stocks that you firmly believe in, not in onces that you don’t understand and can’t explain why you are in them. When all else fails, trust your gut. NEVER hold onto a stock that your gut is telling you it is time to sell. Your gut is almost never wrong in cases such as these.

If the stock represent a long term hold, then your research should include authoritive information on the industries outlook over the next five years along with the company’s true income outlook. If it looks bad then your may want to sell. If your stock is in an emerging market you’ll want to look at a ten year prospectus on the industry and be prepared to treat the stock similar to a ten year bond, meaning hold your position.

If the stock represent short term, aggressive profit only then based the sale on a certain price. If the market expects a fall to continue get out asap. You should have a 3 month time frame to get good figures on the industry’s outlook, set a bottom price for selling and sell at the point.

I generally read analyst research and pay attention to consensus ratings. My rationale is that what is going to happen in the market is driven by the opinion-makers. A company may have great long term prospects, but the stock will go nowhere until respected analysts begin to take notice. I wait until that happens before getting in.

Likewise, when the analysts lose favor, the stock will plummet, even though it may subsequently rebound. I used to look at my overall return and was very happy to see that a stock had tripled, etc. But over time the gains sometimes were reduced to only double. I realized also that this didn’t show me return over time. If something doubled in year one and was level in year 2, essentially, I would be getting 0% return on my money (which was also at risk!).

My solution to this is that I usually give a stock a grace period after purchase, but when I see that a stock has made money (usually at least 15%), then I put in a 15% trailing stop loss sell order to ensure that I don’t lose my initial investment (and if the stock continues to rise, I lock in more profit). But, if a stock is going to decline, it is better to avoid losing the 15%. Consequently, I narrow the stop loss based on the direction of analyst sentiments.

Generally, I buy when analyst sentiment is strong, so 15% is the figure for a strong buy stock. I may reduce the stop loss to 10% for “”Buy”” and to 5% for “”Hold.”” If the consensus is “”Sell,”” I just sell.

When the stop loss triggers, I watch the stock and may buy a stock I like again, usually waiting until the price has dropped another 10%. Note that I am doing most of my trading in retirement accounts, so I usually don’t have to deal with tax issues.

I consider selling if the price of a stock has dropped substantially, or remained stagnant for several months. I also evaluate earnings trends, management changes, revenue growth et cetera. I note whether the company’s fundamentals remain strong. I usually get the information i need from the Securities and Exchange Commission, which makes corporate filings available for free. I try to think about the company’s product line. If it depends on one product alone and has no plans of broadening its product base, i believe it is the right time to sell the stock. With this mind-set i rarely lose money when selling my stocks.

While some of these suggestions are reasonable, others are not. Although it is a well-known fact within the world of finance that historical results are not indicative of future returns, a surprising number of people look at the past to determine when to sell (in the present). If sales increase every Christmas in a predictable fashion, that should have no effect on the market, as that increase has already been priced into the current price of stocks. Stock prices will rise during the holidays only if profits are greater than the market had previously expected. Thus, while there is sometimes a somewhat cyclical pattern in the market, that trend is induced by companies exceeding expectations, not by their simply meeting them through annual holidays.


  1. kewsh

    I would take the $2,000 and invest it into a money market savings account. I’m not savy enough to invest in a stock market as volatile as ours.

  2. Kevin

    I honestly feel that the best way to make a stable $2,000 dollars would be to invest in a company that you don’t normally hear about in the media, but does relatively good in the stocks. Something such as AMD or Red Hat. Because the media cannot affect them as much, the stocks would continue to grow and grow due to its support from its customers. The only thing that could happen to them are their competitors (Say Intel) to come out with something better than them. But if you choose the right company, you’ll be okay.

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