Sunday 17 June 2012

When and Why to sell. "Rules" for Selling a Stock


When and Why to sell
There is really no "time" to sell; however, there are certainly reasons to do so. Most investors, less successful than you will be, believe that you should watch for the price to rise "high enough" — whatever that means—and then sell it to take your profit. Successful fundamental investors know that "profit taking is often profit-losing."

"Rules" for Selling a Stock
The first rule for selling is . . . don‘t! . . . unless:
1) The company has had an adverse management change.
2) Profit margins are declining or the financial structure is deteriorating.
3) Direct or indirect competition stands to affect the company‘s long-term prosperity.
4) A company‘s success is too dependent upon a single product whose cycle is running out.
5) The company is in a cyclical industry and the cycle is about to start down.
6) You must, in order to maintain adequate diversification.
7) An issue of equal or greater quality offers more gain prospects on the upside and less risk on the downside.
8) The stock is way overpriced (at least 150% of the five-year Av-erage P/E) and the company‘s earnings are growing at 12% or less. Even then, you might consider holding-or selling only some of it.

Note that, of the eight reasons for selling listed above, only the eighth suggests that you might sell to take a profit-and then only if: a) the price is way above average; and b) the company is growing relatively slowly.
  • The first five of the rules call for chucking losers.  (Defensive strategy)
  • The sixth suggests "weeding and feeding" in order not to be grossly over weighted in any particular industry or market sector. 
  • The seventh and eighth call for replacing a stock with a low potential only when you can find one as good or better with a greater possible return.   (Offensive strategy)

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