How You Know When To Sell A Stock

Today I fielded a question from a buddy of mine on Twitter (thanks @wkiesel) asking me that age-old and very good question “How do you know when to sell a stock?” This is a question with many answers; the tough part is identifying your particular situation and then committing with no regrets. Some sell decisions will turn out to be genius; others will not. And unfortunately, sometimes you will regret. But let’s take a look at some of the reasons one might want to consider selling. To be sure these aren’t the only ones, but they are some of the more common reasons:

1. The thesis is broken: This one’s actually pretty easy to identify in that you look back at the reasons why you invested in the company to begin with (Be honest with yourself!) and see if those reasons still ring true. If they do, then why sell? If they don’t, or if only some do, then it’s going to take a bit of judgment on your part to decide whether or not it’s worth hanging in there
2. There’s a better opportunity for your money elsewhere: Often times an investment can perform quite well, yet there can even be a better opportunity that comes up. Of course we don’t know until after the fact whether it’s indeed really a better opportunity, but this is definitely a reason to consider selling at least part of a position. It’s also a good argument for making sure that you always have some dry powder (extra cash for opportunistic buying) on hand.
3. You need the money: It’s pretty common wisdom (at least for Fools) that you should only invest money in the market that you can part with for at least five years. The basic idea is that for the individual investor, time is our buddy. We never want to be caught in the position of being a desperate seller. Being a desperate seller sucks in pretty much every regard as you hold no power in the transaction. You need to sell, a buyer knows it and is going to exploit it. Stocks, houses, cars, jewelry, it’s all the same. So in theory, you should never be stuck “needing” the money. But shit happens and emergencies come up; everyone’s situation is different. That said, it’s probably worth just maintaining a liquid emergency fund.
4. You feel you are too overweight a given holding and you’re losing sleep at night: Typically this will be from a stock performing really well; what I like to call a nice problem to have. If this is the case, often the best bet can be to trim the position without eliminating it. Get the allocation back to where you feel comfortable (understand that’s different for everyone).

So there are four reasons, but that certainly isn't all of them. Maybe you want to claim a loss for tax purposes. Or maybe you believe the stock is fully or over-valued (though take care with this one; valuation is as much art as it is science). The point is, there are a lot of reasons to sell and what it takes is not only understanding the various reasons, but then being able to apply the right one(s) to your given situation.

I will also say that when it comes to reasons #2 and #4, rather than sell the entire positon, I tend to like to hang to a small, core position so I can continue to participate. The thinking here is that I’m not really selling because I think the idea has gone south; it’s for other reasons entirely. Keeping a small, core position can be really rewarding, particularly if/when the company continues to do really well. Then you don’t feel like you totally screwed up. You just maybe screwed up a little bit.

Warren, in your particular situation those look like big companies that will be much slower growers but they have some really enticing dividend yields for patient shareholders looking for some long-term income. Holding or selling would be something you’d have to reconcile with the reasons you bought them in the first place.

I hope this helps!

Foolishly,

Jason