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So let me start by saying I probably don't have enough money to invest in individual stocks, but I want to know when I should sell?

I believe in holding stock long-term, investing in companies that I think have good plans laid out for the future, etc. The issue I have is, I don't know when to pull the plug.

One example is a company I bought at around 4.07, and then it went to 5.86, and I sold, and then it kept climbing to $7+. Obviously in hindsight selling was the wrong move.

Another example is a company I invested in about a year ago, that I'm up roughly 100% on. Do I sell now, or do I keep playing through? Is it fearful to sellout, or would it be greedy to play through?

Can someone provide me a useful set of metrics for determining whether or not I should cash out?

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4 Answers

up vote 6 down vote accepted

The psychology of investing is fascinating. I buy a stock that's out of favor at $10, and sell half at a 400% profit, $50/share. Then another half at $100, figuring you don't ever lose taking a profit. Now my Apple shares are over $500, but I only have 100. The $10 purchase was risky as Apple pre-iPod wasn't a company that was guaranteed to survive.

The only intelligent advice I can offer is to look at your holdings frequently, and ask, "would I buy this stock today given its fundamentals and price?" If you wouldn't buy it, you shouldn't hold it. (This is in contrast to the company ratings you see of buy, hold, sell. If I should hold it, but you shouldn't buy it to hold, that makes no sense to me.)

Disclaimer - I am old and have decided stock picking is tough. Most of our retirement accounts are indexed to the S&P. Maybe 10% is in individual stocks. The amount my stocks lag the index is less than my friends spend going to Vegas, so I'm happy with the results. Most people would be far better off indexing than picking stocks.

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This answer relies on why you are holding shares of a company in the first place. So let's address that:

"I believe in holding stock long-term, investing in companies that 
I think have good plans laid out for the future, etc. "

So does this mean you would like to vote with your shares on the directions the company takes? If so, your reasons for selling would be different from the next speculator who only is interested in share price volatility.

Regardless of your participation in potential voting rights associated with your share ownership, a different reason to sell is based on if your fundamental reasons for investing in the company have changed.

Enhancements on this topic include:

  • Trade management, how to deal with position sizes. Buying and selling partial positions based on price action while keeping a core long term position, but this is not something "long term investors" generally put too much effort in.

  • Price targets, start your long term investment with a price target in mind, derived from a future market cap based on your initial fundamental analysis of the company's prospects.

And finally, there are a lot of things you can do with a profitable investment in shares.

  • Using your shares as collateral you can sell covered calls. This can generate income without requiring you to use more money, and can also result in your share position being closed for you if the price increases further... among other things
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If you are already invested in a particular stock, I like JoeTaxpayer's answer. Think about it as if you are re-buying the stocks you own every day you decide to keep them and don't set emotional anchor points about what you paid for them or what they might be worth tomorrow. These lead to two major logical fallacies that investor's commonly fall prey to, Loss Aversion and Sunk Cost, both of which can be bad for your portfolio in the long run.

To avert these natural tendencies, I suggest having a game plan before you purchase a stock based on on your investment goals for that stock. For example a combination of one or more of the following:

  • I'm investing for the long term and I expect this stock to appreciate and will hold it until (specific event/time) at which point I will (sell it all/sell it gradually over a fixed time period) right around the time I need the money.

  • I'm going to bail on this stock if it falls more than X % from my purchase price.

  • I'm going to cash out (all/half/some) of this investment if it gains more than x % from my purchase price to lock in my returns.

The important thing is to arrive at a strategy before you are invested and are likely to be more emotional than rational.

Otherwise, it can be very hard to sell a "hot" stock that has suddenly jumped in price 25% because "it has momentum" (gambler's fallacy). Conversely it can be hard to sell a stock when it drops by 25% because "I know it will bounce back eventually" (Sunk Cost/Loss Aversion Fallacy).

Also, remember that there is opportunity cost from sticking with a losing investment because your brain is saying "I really haven't lost money until I give up and sell it." When logically you should be thinking, "If I move my money to a more promising investment I could get a better return than I am likely to on what I'm holding."

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For what it's worth -- and I realize this isn't directly an answer to the question -- one of the advantages of sticking with mutual funds, beyond their being inherently diversified, is that it removes a lot of the temptation to try to time the market. When you need money, you sell shares in such a way that it maintains your preferred investment ratio, and simply don't worry about which stocks are actually involved.

(I've gotten 15% APR this year across all my investments, for absolutely minimal effort. That's quite good enough for me.)

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The S&P return was nearly 30%, you must have a pretty conservative mix. –  JoeTaxpayer Jan 1 at 19:03
    
Conservative enough that all the recession cost me was about two years. My five-year return's almost identical to the Dow, which puts it about a point and a half behind the S&P. It's weighted down a bit by factoring in an old defined-benefit pension plan which the model treats as a low-yield bond. What I've got is about 30% bond, 40% largecap, 17% international, 8% smallcap, 5% REIT. That's actually considered moderately aggressive for where I am in my career. –  keshlam Jan 2 at 2:35
    
Also, just so you know where I'm coming from: One of my base assumptions is that unless you're willing to spend the amount of time and effort a pro does, "beating the market" in the long term is not a reasonable goal. The market is a game run by pros, for pros, and the same rules apply as at the poker table: If you don't see the sucker, he's sitting in your chair. –  keshlam Jan 2 at 14:35
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