To hold or to sell? Holding should occur only if no tests for selling are failed.

To hold or to sell?

In any discussion of holding versus selling stocks, the circumstances under which it is best to sell should be outlined first.  Holding should occur only if no tests for selling are failed.

The company-related reasons to sell are:

1. Sell if the news cannot get any better.
2. Sell if things did not go as planned.
3. Sell when the broker's advice goes from 'buy' to 'hold.'
4. Sell if company fundamentals are getting sick.
5. Sell on the rebound in the aftermath of material, unexpected or discrete bad news.
6. Sell in certain cases when expected news is delayed.

The market-action reasons to sell are:

1. Sell when the stock reaches the target.
2. Sell on an unsustainable upward price spike on big volume.
3. Sell when a portfolio shows all gains.
4. Sell if the stock is lazy money and likely to stay that way.
5. Sell using above-market limit orders, letting the market come to the investor.
6. Sell with a stop-loss order, but never remove or lower it.

Investor-related reasons to sell are:

1. Sell if the stock would not be bought again today.
2. Sell after gloating or counting the chips.
3. Sell rather than hope against hope for a 'maybe' bailout.
4. Sell and step aside on a personal losing streak.

If an investor sells stocks in a disciplined manner using the signal above, he is likely to end up with a good deal of cash before the market moves into a bear cycle.  Relatively few of his holdings will fail to hit one of  the 16 triggers noted in those lists above.  Those stocks that do survive will tend to be high-quality growth issues that have continued to perform fundamentally and have not run up to unreasonable price levels.  Some experts refer to these as core holdings or 'businessman's risk' foundation stocks.  They are stocks that have given consistent indications they can be held through good and bad in the market.

All other stocks will have become sales before a panic bottom because:

1. They worked as planned.
2. They acted too well for a brief period of time.
3. They got unreasonably priced.
4. They were wasting the time value of money by going nowhere.
5. They developed significant fundamental problems. 

Very few stocks can escape all those screens for a long period.  So if an investor is cashing in as prescribed and if his buying discipline rejects new positions when valuations get too pricey, he ends up still holding very few stocks as the market get toppy.  That, of course, protects his capital.

There are two major price-driving forces:

• fundamentals (which control the long term) and 
• psychology (which rules the short and medium term).

The fundamental and psychological factors affect stocks in both directions.  And as an overlay, understand that they can affect a stock either

• directly (because of the company behind the stock itself) or
• indirectly (because the market trend is so strong that virtually no stocks can buck it).  

However, the indirect effect is much stronger on the downside than on the upside:  fear is a more powerful driver than greed.