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I have a 10 stock portfolio and considering market conditions that are on the rise when this question in being asked, a few of them did hit their 52-week high price.

I would like to call myself a long term investor and I do not like to trade so much. If I take "Buy low sell high" as gospel then this is in my opinion a good selling position.

On one hand, I think I should lock my profit because stocks don't hit a 52-week high every day, but on the other hand, there is nothing wrong with the company and it is very well positioned to go up even further.

Any suggestions?

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    Based on what have you picked these stocks originally? Has that criteria changed? If not - why do you care about some arbitrary peak on some arbitrary graph? – littleadv Oct 20 '15 at 2:20
  • Does your heart sink when the news opens up with "The dow jones down 300 points today!"...do you start stressing out? If you are in it only to make a profit than go sell...but if you are a long term investor, turn off the TV (and the silly media) and research about how your stock may increase 10x! – JonH Oct 20 '15 at 15:50
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    If there was one golden rule to maximizing profit from the stock market, everyone would use it, then the rule would become useless. – Nick T Oct 20 '15 at 20:09
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    @NickT is right. "Buy low, sell high" is exactly as good advice for stock traders as "pick good numbers" is for someone buying lottery tickets. – Mason Wheeler Oct 21 '15 at 12:00
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    What's so special about 52? A year isn't some sort of automatic growth cut-off point. – user2357112 Oct 21 '15 at 15:44

12 Answers 12

81

Though it seems unintuitive, you should rationally ignore the past performance of this stock (including the fact that it's at its 52-week high) and focus exclusively on factors that you believe should affect it moving forward. If you think it's going to go up even further, more than the return on your other options for where to put the money, keep the stock. If you think it's peaked and will be going down, now's a good time to sell.

To put it another way: if you didn't already have this stock, would you buy it today?
Your choice is just about the same: you can choose between a sum of cash equal to the present market value of the shares, OR the shares. Which do you think is worth more?

You also mentioned that you only have 10 stocks in the portfolio. Some are probably a larger percentage than others, and this distribution may be different than what you want in your portfolio. It may be time to do some rebalancing, which could involve selling some shares where your position is too large (as a % of your portfolio) and using the proceeds toward one or more categories you're not as invested in as you would like to be. This might be a good opportunity to increase the diversity in your portfolio.

If part of your reward and motivation for trading is emotional, not purely financial, you could sell now, mark it as a "win," and move on to another opportunity. Trading based on emotions is not likely to optimize your future balance, but not everybody is into trading or money for money's sake. What's going to help you sleep better at night and help boost your quality of life? If holding the stock will make you stress and regret a missed opportunity if it goes down, and selling it will make you feel happy and confident even if it still goes up more (e.g. you interpret that as further confirming that you made a good pick in the first place), you might decide that the risk of suboptimal financial returns (from emotion-based trading) is acceptable.

As CQM points out, you could also set a trailing sell order to activate only when the stock is a certain percentage or dollar amount below whatever it peaks at between the time you set the order and the time it fires/expires; the activation price will rise with the stock and hold as it falls.

  • moving forward this is why Apple can announce record sales, record profit, MAGIC!!!... and then the stocks drop 10%... because people are skittish about the future: Competition, missed expectations on launches, etc. Doesn't matter what about the past... it's about betting on the future. (just using Apple as an example, because I've seen those results) – WernerCD Oct 20 '15 at 22:19
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    @WernerCD: That, and record profit is only grounds for an uptick if the market didn't already include record profit into the price. The issue isn't whether the company looks good for the future, it's whether the company looks as good as the expectation factored into the current price. No matter how good a company is, you can very (very) roughly expect 50% of company reports to result in increased price and 50% to result in decreased, purely on the basis that the market will over-estimate half the time and under-estimate the other half. I don't know whether the actual figure is 50% ;-) – Steve Jessop Oct 20 '15 at 23:50
  • While I definitely agree you should only consider the future with respect to performance, you should also take into account the amount of time you've had the stock for the capital gains tax benefit, at least for a serious "long term investor" as the OP claims to be. – Kevin Oct 21 '15 at 2:39
41

I bought 1000 shares of Apple, when it was $5. And yet, while the purchase was smart, the sales were the dumbest of my life. "You can't go wrong taking a profit" "When a stock doubles sell half and let it ride", etc. It doubled, I sold half, a $5000 gain. Then it split, and kept going up. Long story short, I took gains of just under $50,000 as it rose, and had 100 shares left for the 7 to 1 split. The 700 shares are worth $79,000. But, if I simply let it ride, 1000 shares split to 14,000. $1.4M. I suppose turning $5,000 into $130K is cause for celebration, but it will stay with me as the lost $1.3M opportunity.

Look at the chart and tell me the value of selling stocks at their 52 week high. Yet, if you chart stocks heading into the dotcom bubble, you'll see a history of $100 stocks crashing to single digits. But none of them sported a P/E of 12.

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    Is this based on a true story? If so I'm sorry man..I really am :-). – JonH Oct 20 '15 at 15:53
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    Yes. True. Fortunately, most of our savings is in an S&P fund within our 401(k). And I really can't complain about only being ahead $125K, when just that is more than most people have saved for retirement. It just seemed appropriate to offer this as a response to one thinking of selling stock that may just keep rising. – JoeTaxpayer Oct 20 '15 at 16:57
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    This doesn't prove much. What if you had bought 1,000 shares in Enron early in the company's life? You would feel much better about all the gains you realised, and wouldn't have cared much at all about the nosedive to 0. – jwg Oct 21 '15 at 15:45
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    @jwg - you should consider writing an answer citing the Enron example of why selling a stock at 52 week high is a good idea. Such a counter example offers the seed of a good answer, perhaps. – JoeTaxpayer Oct 21 '15 at 16:20
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    Fair enough. I suppose one can look at any of thousands of stocks not purchased as missed opportunities. The distinction here is twofold. That it was in my account, and letting it ride would have been a better outcome. And that I actually bought the number of shares that would have gotten me the gains I mentioned. This is a far cry from "I wish i bought some stock I never heard of before," "I bought xyz, but should have bought more" or even "A stock I follow went up X-fold." Regardless, this only serves as example of holding a growing stock for a long time, not selling too soon. – JoeTaxpayer Oct 22 '15 at 23:09
22

Buy low, sell high.

I think a lot of people apply that advice wrongly. Instead of using this as advice about when to buy and when to sell, you should use it as advice about when not to buy and when not to sell.

Don't buy when P/Es cannot support the current stock price. Don't sell when stocks have already fallen due to a market panic. Don't follow the herd or you will get trampled when they reverse direction in a panic.

If you are smart enough to sell ahead of the panics, more power to you, but you should be using more than a 52-week high on a graph to make that decision.

4

Obviously a stock that's hit a high is profit waiting to be taken, be safe, take the money, Sell Sell Sell!!

Ah.. but wait, they say "run your winners, cut your losers", so here this stock is a winner... keep on to it, Hold Hold Hold!!!!!

Of course, if you're holding, then you think it's going to return even higher.... Buy Buy Buy!!!!

So, hope that's clears things up for you - Sell, Hold, or maybe Buy :-)

A more serious answer is not ever to worry about past performance, if its gone past a reasonable valuation then consider selling, but never care about selling out just because its reached some arbitrary share price. If you are worried about losses, you might like to set a trailing stop and sell if it drops, but if you're a LTBH type person, just keep it until you feel it is overvalued compared to its fundamentals.

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I primarily intend to add on to WBT's answer, which is good. It has been shown that "momentum" is a very real, tangible factor in stock returns. Stocks that have done well tend to keep doing well; stocks that are doing poorly tend to keep doing poorly. For a long-term value investor, of course fundamental valuation should be your first thing to look at - but as long as you're comfortable with the company's price as compared to its value, you should absolutely hang onto it if it's been going up. The old saying on Wall Street is "Cut your losses, and let your winners ride." As WBT said, there may be some tangible emotional benefit to marking your win while you're ahead and not risking that it tanks, but I'd say the odds are in your favor. If an undervalued company starts rising in stock price, maybe that means the market is starting to recognize it for the deal it is. Hang onto it and enjoy the fruits of your research.

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You should sell all your stock immediately and reinvest the money in index funds. As of right now you're competing against prop trading shops, multinational banks, and the like, who probably know a teensy bit more about that particular stock than you do.

I'm sorry, any other advice is missing the point that you shouldn't be picking stocks in the first place.

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    I dont agree that index funds are the way to go. And even if they were you dont know anything about the OP or the stocks he owns. He could be a board member for all you know! – von Mises Oct 21 '15 at 20:29
  • @vonMises what do you recommend instead of index funds? – djechlin Oct 21 '15 at 20:42
  • Its probably best left for another question :) The short answer though is that index funds are only appropriate if you plan on doing 0 research to track your investments. Spending just 10 min/week reading finance news could give you a major advantage, and that knowledge should be put to use. Also keep in mind index fund gains may be all due to a handful (< 10) stocks, essentially making you a stockpicker anyway. wsj.com/articles/… – von Mises Oct 22 '15 at 18:45
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    @vonMises that last sentence is backwards. You don't know which 10 stocks will produce the gain as you are not a stockpicker. And you also don't know they will, you in fact linked an article showing they did. If you had that article a year ago, heck yes you could have made a lot of money - appropriate for Back to the Future Day. – djechlin Oct 22 '15 at 19:03
  • Yes that is true and that is certainly one advantage. And indexes take out the bad stocks and add good ones when they rebalance. but I think my point was that index funds are not as diversified as it initially appears. SPY is extremely sensitive to movements in AAPL, which is not what youd expect from an index with 500 components. – von Mises Oct 22 '15 at 20:01
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Here in Australia a stock price is usually highest just before a dividend and lowest just after a dividend. If you buy just after the dividend then you missed out until next time. There may be many other reasons why a stock may exhibit yearly, quarterly and monthly cycles.

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You asked for advice, so I'll offer it. Trying to time the market is not a great strategy unless you're sitting in front of a Bloomberg terminal all the time. Another person answering your question suggests the use of index funds; he's likely to be right.

Look up "asset allocation." What you want to do is decide that you want your portfolio to contain, for example:

30% - 35% growth stocks
25% - 30% growth and income stocks
30% - 35% stocks from markets outside your own country
10% - 15% bonds

If one of your stock holdings goes up far enough that you're out of your target asset allocation ranges, sell some of it and buy something in another asset class,s so you're back in balance. That way you lock in some profit when things go up, without losing access to potential future profits. The same applies if something goes down; you buy more of that asset class by selling others.

This has worked really well for me for 30+ years.

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Insofar as a 52 week high indicates a peak, yes. However, the truth is that "buying low and selling high" means "Act a Fool!"

You see, when you buy low, you are perceived to be buying total garbage - throwing your money away and conversely when selling high you are perceived to be a total idiot - selling a winner. That's how people will see you when you are in fact buying low and/or selling high, right? It's those people that (mis)value the asset, right? An asset is worth what the people will pay for it, right?

...And don't forget that holding a loser is MUCH easier than holding a winner.

Good luck!

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Selling as well as buying a stock are part science and part art form. I remember once selling a stock at its 52 week high too. That particular stock "quadrupled" in value over the next 52 weeks. Mind you I made 50% ROI on the stock but my point is that none of us have a crystal ball on whether a particular stock will ever stop or start going up or stop or start going down. If someone had those answers they wouldn't be telling you they would be practicing them to make more money! Make up your mind what you want to make and stick by your decisions. Bulls make money when stocks go up and Bears make money when they go down but pigs don't make money. -RobF

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One possibility is to lock in gains by selling, where a selling price can attempt to be optimized by initiating a trailing stop loss order. You'll have to look at the pros and cons of that kind of order to see if it is right for you.

Another possibility is to begin hedging with options contracts, if that security is optionable. Puts with the appropriate delta will cost over time against future gains in the stock's price, but will protect your wealth if the stock price falls from this high point.

These possibilities depend on what your investment goals are. For instance, if you are buying no matter what price because you like the forward guidance of the company, then it changes your capital growth and preservation decisions.

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As per the chart pattern when ever a stock breaks its 52 week high.

  1. It lands into free zone which is depends also on the positive volume but most of the stocks give you at least 5-10% more after breaking the 52 week high with good positive volume.
  2. best strategy is to keep 60-40% ratio sell off your lion share when your stock as reached such points and play with other 30% with a 52 week high as stop loss.

This information may differ for penny stocks,small caps and mid cap stocks

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