Monday, 4 August 2008

Stock Sale Considerations (Part 2 of 5)



Not so good reasons

x To "lock in a profit."
· WARNING: Trading results in higher taxes and commissions, and lower returns.
· Concentrate on cutting losses instead of "protecting your gains"

x Stock has reached predetermined limit.
· WARNING: Sell limit orders generate certain tax liability, possibly at higher rates.
· Eliminates the chance of any future growth in that stock.

x "Stock hasn't done anything."
· WARNING: Prices don't move in linear, consistent fashion, but in spurts.
· Remember that price growth follows profits, eventually.
· Determine if a stock is languishing for a reason.

x Company is subject of temporary bad news.
· WARNING: Avoid knee-jerk reactions, though market may respond negatively.
· Re-evaluate to determine possible long-term impact of news.

x Company has missed earnings estimates by small amount.
· WARNING: Focus on long-term, not short-term results.
· Re-evaluate to determine if there is a fundamental shift underway at the company.

x An analyst has downgraded the stock.
· WARNING: Analysts have short-term, not long-term, objectives.
· May have lowered rating to protect realized gains, not due to long-term potential.

Good reasons

o To raise cash.
· Consider it an opportunity to prune underperformers.
· If you don't have any underperformers, then consider tax impact of selling.

o To raise cash for club withdrawal.
· Consider it an opportunity to prune underperformers.
· Don't sell highly appreciated stock, transfer shares to departing member instead.

o The stock is possibly overvalued.
· Relative Value using forward PE is greater than 150%.
· Stock is in sell zone on SSG.
· Projected total return less than long-term returns on bonds.

o To take a capital loss.
· Sell stocks at loss in taxable accounts to offset any gains.
· Part of year-end portfolio review.
· After offsetting losses, can use $3,000 of capital gains to offset ordinary income.
· Evaluate for repurchase after 30 days (to avoid wash sale rule)

o To upgrade quality or expected return of portfolio.
· Determine round trip cost, amount to invest in new stock after taxes and commissions.
· Use Toolkit Challenger or Stock Analyst Cost of Switching tool to evaluate.
· Use NAIC Challenge Tree to evaluate.

o Because fundamentals have changed.
Proceed to Section C*. (*See next post)

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