Saturday, 23 June 2012

Buy and Hold — Is It For You?

Let's take a look at what exactly "buy and hold" means. We'll also look at how long is long and when you should sell a stock.

What Does "Buy and Hold" Mean
It's an investment strategy that blends seamlessly with Fundamental Analysis. After you buy a stock, you hold on to it for a while even if its price bounces wildly. You sell only when you have good reason to.

You can see see how this is radically different from a market timing strategy — buy low, sell high.
This brings us to a very important question — how long is long?

Long is relative. From a buy and hold perspective, long would mean at least several weeks. Anything shorter than that would generally fall under another stock investing strategy called day trading.

If you've bought the stock based on the fundamentals, then you should sell only if you have very good reason to. And that brings us to the next important point....

  • When the price of a stock crosses its intrinsic value — the stock is now getting overvalued and with that comes the risk of a sudden drop in price. Time to lock in your profit and exit.

  • You realize you made a mistake in your analysis — it happens every once in a while. You find something you don't like about the company or its management. Had you known that before you invested, you would have never bought the stock. If the reasons you bought the stock are no longer valid, it's best to sell. Remove the emotion out of the decision, admit you made a mistake, and sell. You will be better off.

  • The fundamentals have deteriorated — the strong past financial performance of the company have now started going south. Evaluate the situation. If it doesn't look like the company will come out of the decline anytime soon, it may be time to sell.

  • A better opportunity comes along — you find another company to invest in with great financials and a very attractive price. One small problem .... you don't have enough cash to buy a meaningful amount of stock. Can you sell one or more of the stocks you own that will free up some cash?

The buy and hold strategy does not mean owning a stock indefinitely. Believe it or not, selling a stock is much harder than buying a stock. You tend to get emotionally attached to the stock. It's hard to sell when the price has fallen steeply — you're always hoping that somehow the price will come back up again and you won't loose your money. It's hard to sell when the price rises — you don't want to get in the way of a good thing.

So again, let your stock investing strategy dictate when you should sell. Try and not let emotion get in the way. Remember ... you want to own the stock as long as you don't have a good enough reason to sell it. But if you do have a reason, sell it. Get it over with. Move on.

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