Selling is often a harder decision than buying

 

Selling is often a harder decision than buying

"If you have bought a good quality stock at bargain or reasonable price, you can often hold forever." 

Investing is fun.  For every rule, there is always an exception. 

The main reasons for selling a stock are:

1.  When the fundamental has deteriorated permanently,  (Sell urgently)

2.  When it is overpriced, whereby the upside gain will be unlikely or very small and the downside loss will be big or certain.

We shall examine reason No. 2 through the property market.  The property market is also cyclical.  There were periods of booms and dooms. 

If you have a good piece of property that is always 100% tenanted and which gives you good consistent return (let's say 2x or 3x risk free FD rates), would you not hold this property forever?  The answer is probably yes.

Then, when would you sell this property?

Note that the valuation of property, as with stocks, is both objective and subjective.

Would you sell when someone offered to buy at 500% above your perceived market price?  

Probably yes, as this is obviously overpriced.  You could cash out and probably easily re-employ the money to earn better returns in another property (or properties) or other assets. 

Would you sell when someone offered to buy at 50% above your perceived market price? 

Maybe yes or maybe no.  You can offer your many reasons.  

However, all these will be based on the perceived future returns you can hope to get from this property in the future.  This is both objective based on past returns obtained and subjective and speculative on future returns.

However, unlike reason No.1 when you would need to sell urgently to another buyer to prevent sustaining a permanent loss, you need not sell just because someone offered to buy the property at high price. (However, there are also those who "flip properties" for their earnings; they will sell quickly for a quick profit.)  You will not suffer a loss but only a diminished return at worse.  You can take your time to work out the mathematics.  

You maybe surprised that you may still achieve a return higher at a time in the near future by rejecting the present immediate gain based on the present high price offered.  

Also, you would need to price in the lost opportunity cost when the property is sold at this price, even though it is 50% above the perceived normal market price.  Could you buy a similar quality property with the same sustainable increasing income or return by offering the same price?

Similarly, the same line of thinking can be applied to your selling of shares.  

When should you sell your shares?  

Yes, definitely when the fundamentals have deteriorated permanently.  The business has suffered for various reasons and going forward, the earnings will be permanently impaired and deteriorating.  

Yes, when the price is very very overpriced.  However, you need not sell your shares in good quality companies that you bought at fair or bargain price.  As long as the fundamentals are strong and the business is adding value, selling now at a higher price may mean losing the return that you could have obtained in the future years from owning this stock and the opportunity cost of reinvesting the cash into another stock of similar quality and returns.  

Once again, the importance of sound reasoning and doing the mathematics in making a decision whether to sell or not.

Is it not true, that the really big fortunes from common stocks have been garnered by those

• who made a substantial commitment in theearly years of a company in whose future they had great confidence and
• who held their original shares unwaveringly while they increased 10-fold or 100-fold or more in value?

The answer is "Yes."

http://myinvestingnotes.blogspot.com/2012/07/my-18-points-guide-to-successfully.html

Additional notes: 

Other reasons for selling a stock (or property) are:

• To raise cash to reinvest into another asset with better return.
• A certain stock (or property sector) may be over-represented in your portfolio due to recent rapid price rises and you need to reduce its weightage to reduce your risk of over-exposure in this single stock (or property sector).

Footnote: 

This is a true story. A rich man was approached by a buyer to sell his property. A few neighbouring lots were sold for $1.6 m the last 2 years. What offer will ensure that you sell your property to me?  Please let me know. The unwilling owner replied, "$5 million". There is a lesson here too. :-)

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.

The process of deciding to sell a stock is a difficult one unless an investor has developed a methodology.

The process of deciding to sell a stock is a difficult one at best unless an investor has developed a methodology and adheres to it mechanically in order to avoid inevitable internal mental battles.  

When a loss is involved, the sell decision is even more difficult because the issue of pain-avoidance is now present.

It is human nature to seek self-preservation, and pain is a phenomenon that indicates a danger to well-being.

Some investors are obsessed with safety, but most are reasonably balanced in their tolerance of the risk involved in earning a profit.  But every investor has some threshold at which pain is avoided, sometimes at ridiculous cost.  

Dealing with an investment or trading loss involves not only financial pain, but also ego pain.  A majority of shareholders at some point attempt to avoid both pains by failing to deal with the reality of their losses.  

One of the most convenient ways to avoid the pain of loss - or even of profit squandered - is denial.  They prefer not to think about it, or they minimize it.  

When specific stock positions go bad, the pain-avoider becomes a longer-term holder who is more accurately a collector of stocks.  He has no real investment motive or astuteness of value judgement and is, in fact, simply denying the pain of potential loss.

Making the "sell decision"

Making the "sell decision"

And now, the hardest part.

"You thought 'marrying' the stock was difficult, full of unknowns and subjective assessments? Try the divorce!"

In investing, selling can be one of the hardest things to do. Investors get emotionally vested in their decisions, and hangin on becomes more a matter of hope - and desire to be right "after all" - than a rational, conscious decision based on a company's merit.

True value investors don't think this way. Value investors watch their businesses perform just as a good manager would, and when they stop performing, they get out. It's really one of the great attributes of stock investing: Investors don't get the headaches that managers and small business owners get. When things turn, or when a better opportunity arises, they can just sell and move on. The upshot: Keep track the company's story, and be ready to reappraise and move on if the new appraisal comes up short.

The "sell decision"

A condensed thought process and framework may help. Most experienced investors know that selling takes more discipline and can be more difficult than buying.

For value investors, the main rule about selling is this: The thought process is similar to the buying decision. A business must be a good business to consider owning it, and the price must reflect, or be lower than, the value of the business.

1. If the price exceeds the value of the business, it's time to sell.

Additionally, value investors should consider selling when:

2. The business changes: Any change in fundamentals or the intangibles that drive them signal at least a re-evaluation, and perhaps a sale, of the business. So a changing marketplace, supply chain, interest rates, cost structure, management team - you name it - can trigger a reassessment and sale.

3. There's something else better to buy: Your company may be good, but perhaps there's a better ne out there. Selling should only be done when there's something else better to buy, even if that "something else" is a fixed income cash deposit or a rental property or even a vacation home. If 5 percent risk-free is better than your investment right now, then that's the "better thing to buy." If there isn't something better to buy, then your investment is probably okay.

4. When you need the money: No additional explanation necessary.

Sell the losers, let the winners run

Why selling is a common problem
Published: 2009/02/04


Most investors tend to agree that the decision to sell a stock is one of the most difficult to make. Sometimes it is more difficult to decide when and what to sell than to buy. Ever wondered why?

* People tend to sell winners too soon and hold on to losers too long

You will find that regardless of whether the market is running hot or is coming down, there are still a lot of people out there who either sell their stocks too early only to realize that the prices continue to soar, or hold on to losers for too long only to see them continue to bleed further.

From a behavioural finance standpoint, this phenomenon is held by Hersh Shefrin and Meir Statman (1985) as the "disposition effect". This was discovered from their research entitled, "The disposition to sell winners too early and ride losers too long: theory and evidence".

Based on research, individual investors are more likely to sell stocks that have gone up in value, rather than those that have gone down. By not selling, they are hoping that the price of the losers will eventually go back to their purchase price or even higher, saving them from experiencing a painful loss.

In the end, most investors will end up selling good quality stocks the minute the prices move up and hold on to those poor fundamental stocks for the long term, while the performances of these stocks continue to deteriorate.

* People tend to forget their original objectives

In stock market investment, there are two types of investment activities, trading versus investing. Trading means "buy and sell" while investing means "buy and hold". The stock selection criteria for these two types of activities are entirely different.

Most of the time those involved in trading will choose stocks based on factors which will affect the price movement in short term, paying less attention to the companies' fundamentals whereas those involved in investment will go for good quality stocks which are more suitable for long-term holding.

However, you will find that many people get their objectives mixed up in the process. They get distracted by external factors so much so that some panic when the market goes in the direction that is not in line with their expectation, and as a result, end up selling the stocks that they find too expensive to buy back later.

On the other hand, some force themselves to change the status of the stocks that were originally meant for short-term trading into long-term investment as they are unable to face the harsh fact that they have to sell the stocks at a loss, even though they know that the stocks are not good fundamental stocks that can appreciate in value.

So, when to sell then?

There are few different schools of thoughts on this. Based on the advice from the investments gurus, like Benjamin Graham, Warren Buffet and Philip Fisher, when you buy a stock, you need to make sure that you understand the companies that you are buying, and these are good fundamental stocks, which will provide good income and appreciate in value in long term.

Therefore, you will be treating your stock purchase as a business you bought, which is meant for long term. You should not be affected by any temporary price movement due to overall market volatility.

You will only consider selling the company if the growth of the company's intrinsic value falls below "satisfactory" level or you find out that a mistake was made in the original analysis as you grow more familiar to the business or industry.

However, if you find that your investment portfolio is highly concentrated on one single company, then you might want to consider diversifying your portfolio and lowering your risk.

Any single investment that is more than 10 per cent to 15 per cent of your portfolio value should be reconsidered no matter how solid the company performance or prospect is, suggested Pat Dorsey of Morningstar.

Last but not least, if you find that by selling the stock, you can invest the money in a better option, then that is a good reason to sell.

In summary, successful investing is highly dependent on your self-discipline, taking away the emotional factors and not going with the crowd. It should always be backed by sound investment principles.

Always remember there is no short cut in investment, only hard work and patience.

Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.

http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC2/Article/index_html

Why You Should Sell

Why You Should Sell
By Brian Richards and Tim Hanson February 20, 2009 Comments (74)


I can be just as dumb as anybody else. -- Peter Lynch, September 2008
Peter Lynch earned near-30% annual returns running Fidelity Magellan from 1977 to 1990. He's sold millions of books, raised millions for charity, and holds the rare distinction of having a Motley Fool Global HQ conference room named after him.

But in September 2008, Peter Lynch also had the ignominious honor of holding both AIG (NYSE: AIG) and Fannie Mae (NYSE: FNM) in his personal portfolio -- as they dropped 82% and 76%, respectively, during that month alone.

Ouch.

For those of us who have spent our investing careers trying to match the great Peter Lynch … well, if you lost 80% in September, then congratulations -- you did it! If you did better than negative 80%, then you beat the great Peter Lynch.

Invest like Peter Lynch We kid, of course, and we're in no way demeaning Lynch or his illustrious career. Rather, we're just pointing out how hard it's been to avoid a flameout lately. When the blue-chip S&P 500 has dropped some 40% over the course of a year, you know it's bad.

And when companies like Boeing (NYSE: BA) and Adobe Systems (Nasdaq: ADBE) drop more than 50% in the course of a year -- even though they're historically strong operators that appear to have little to do with the crisis on Wall Street -- you know it's rough out there for pretty much everyone.

In other words, even if you don't own AIG or Fannie, you probably own a stock like AIG or Fannie. We sure do. Brian, for example, has ridden Whole Foods Market (Nasdaq: WFMI) from $40 to $12, while Tim has watched pump-maker Colfax sink from $20 on down to $10. Ahem.
We are not aloneAnd while there are many stocks that will recover from this market downturn, it's likely we're all continuing to hold stocks that won't. New research, from Professors Nicholas Barberis and Wei Xiong of Yale and Princeton Universities, gives a name for this tendency. We're exhibiting "realization utility."

Realization utility encourages investors to hang on to stocks that have sunk -- even when those stocks have dim futures. Here's how they explain it:

The authors consider an additional experimental condition in which the experimenter liquidates subjects' holdings and then tells them that they are free to reinvest the proceeds in any way they like. If subjects were holding on to their losing stocks because they thought that these stocks would rebound, we would expect them to re-establish their positions in these losing stocks. In fact, subjects do not re-establish these positions.

That's right. If we force-sold all of your stocks and gave you the cash to reinvest, would you buy the stocks we had just sold? Odds are, you wouldn't.

So, why would you hold on to stocks that you don't think will recover? We'll let the good professors give it to you straight:

Subjects were refusing to sell their losers simply because it would have been painful to do so … subjects were relieved when the experimenter intervened and did it for them.

Wait a second

But aren't we the guys who pounded the table two years ago about how individual investors like us sell winners too early, missing out on life-changing multibagger gains to lock in a modest return? "Quick trigger fingers aren't rewarded," we wrote at the time.

And that's still true. But down markets like this one present an enormous long-term opportunity for investors … only so long as you're willing to do some selling.

See, when stocks are expensive, we may invest in mediocre stocks because they look cheap, while passing on superior operators because they're too expensive. Today, however, those superior operators are all down double digits at least.

Google (Nasdaq: GOOG), for example, dropped more than 50% in 2008. Dream stock Microsoft (Nasdaq: MSFT) -- given its growth, FCF-generating abilities, competitive advantages, and bulletproof balance sheet -- has a P/E in the single digits!

In other words, now is the time to upgrade your portfolio.

Why you should sell

You should always sell when you have a better place to put your money -- and today, a host of superior companies are on sale. The takeaway, then, is to recognize when realization utility may take root, take a sober view of your holdings, and take advantage of this down market to upgrade your portfolio. Ten years from now, you'll be very glad you did.

We're both looking to take advantage of current prices in foreign markets -- which have been hammered even worse than our own S&P 500.

Brian Richards owns shares of Microsoft and Whole Foods Market (still). Global Gains co-advisor Tim Hanson owns Colfax. Microsoft is a Motley Fool Inside Value recommendation. Google is a Rule Breakers selection. Whole Foods is a Stock Advisor pick. The Motley Fool has a disclosure policy.

Read/Post Comments (74)

http://www.fool.com/investing/international/2009/02/20/why-you-should-sell.aspx


Some interesting comments:


On February 20, 2009, at 11:03 AM, DargFool wrote:

I love the statement, "You should always sell when you have a better place to put your money".

I give that a capital DUH. The problem is identifying when one place is better than another. Presumably the losing positions you are holding were "better places to put your money" at the time you bought them.

The buy and hold investors basically say, hey, we have no chance of identifying which investments will do better than the other, so we will get our returns by trading infrequently.

The value investors say, We only buy quality cheap, and we think we can differentiate between cheap quality and cheap crap.

The growth investors say, We can't tell what it's worth, but if it is moving in the right direction, then by a fallible application of Newton's law, a stock price in motion tends to stay in motion.

The financial planners say, everything is a gamble so you have to a million small bets instead of a few large bets. And by the way, here is your bill.

The traders and talking heads say, Buy my computer trading system, its models have been tested in all market conditions, and it generates returns of 23% (your results may vary).

The hedgers say, I don't know which way its going to move, but if it moves a lot I win.

The average investor says, "Damn, screwed again. I paid that CEO 10 million to LEAVE the company after I got a 90% loss. Great job Board of Directors, you are really on top of things!". I am taking what's left of my money and buying a beer. At least I can enjoy that.

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Report this Comment On February 20, 2009, at 6:04 PM, Redbird95 wrote: Great but even "safe" stocks continue to drop. I can see the sell but buy now? I thought GE was a great bargin at $15 (down from $35) now it is $9 (another 40% down) with a yield of 13% but will it go to $6? Sometimes ridding a new purchase down is worse than seeing the old ones sink.

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On February 21, 2009, at 12:13 AM, TradeNakedOption wrote: The high dividends on quality companies like GE look great. But if you get 10% and the stock drops 20%, you are not doing your account any good.

My bias is to be neither short nor long the market. I talk more about this with options on my blog:

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Report this Comment On February 21, 2009, at 12:39 AM, truthisntstupid wrote: No thanks. One of my picks did get crushed but I liked it then and I'll like it again. Be stupid to sell it because its down then decide ten years from now that I like it again and buy in again higher - now wouldn't it? It's still the same company, still has a wide moat, still an iconic brand - and long-term prospects are no worse now than they were when i picked it. If more people thought for the truly long term when they buy (buy and KEEP) they would find that it forces you to think a lot differently and put a lot more time and consideration into choosing companies they would have unshakeable confidence in even when something like this happens.

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Report this Comment On February 22, 2009, at 11:14 AM, truthisntstupid wrote: Samscreek

some of these people don't seem to realize what long term is. I buy with no plans on ever selling and it forces me not to try to capitalize on short-term movements. To me it's the difference between gambling & investing.

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Report this Comment On February 22, 2009, at 11:35 AM, ReillyDiefenbach wrote: Investing in stocks is ALWAYS a gamble.

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Report this Comment On February 22, 2009, at 12:01 PM, truthisntstupid wrote: True. But is my investing for dividends in companies like P&G and PEP and various utilities gambling to the same extent as people trying to capitalize on short-term price movements? I read the "Intelligent Investor" and like the mental perspective of taking the view that I'm buying "a piece of a business" instead of a number whose volatility might give me a profit. Love Ben Graham for the mental aspect of what that book teaches yet I'm not really a "value investor."

I'm more of a dividend investor that believes in the ownership viewpoint that Ben Graham teaches

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On February 23, 2009, at 2:19 PM, Ecomike wrote: I stayed out of the market for 20 years, got back in in October as I started to see stocks on sale. So far I have been up, down and even, right now about even, which means I am holding about twice as much stock as I had 4 months ago. I sold NCX today at 300% profit on an Arab (Dudais, UAE?) Take over, taking it private at a 300% premium over last weeks closing pricing. They are buying and we are selling. SIRI got a private (Non-gov) bail out last week, stock tripled in one day. Trick is buy stocks that get hammered huge.

I feel pretty good as I am even with my peak value from last year as of today, with the market at a new bottom.


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Report this Comment On February 27, 2009, at 3:15 PM, kpmom wrote: See when I see things like this, I wonder why I ever subscribed to the Motley Fool publications, and am glad I canceled my subscriptions. Y'all rode your stocks down 40%, 50%, 60%, and MORE??? Why????

And you guys have the nerve to CHARGE for your "reccomendations"? This is the problem with the MF's "buy and hold" forever mentality. Do you realize how long it will take to make those losses up (if ever), never mind moving ahead? I follow IBD's reccomendation to cut all losses at 7-8%. And don't tell me about Buffett's buy and hold strategy. He's a zillionaire. Most of the rest of us are not. Shame on you all for not advising your follows to PRESERVE CAPITAL at all costs. For we workin' stiffs it's the name of the game

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Report this Comment On February 27, 2009, at 3:56 PM, JoeyBallz wrote: Hey whiney guys that are bitching about losing their money on stock recommendations from Fool. Just because they each recommend a stock to buy each month doesn't mean that you should go out right then and there and buy it. There are dozens of underlying factors that you need to consider before just buying whatever a newsletter says (No, I'm not going to explain them to you, go read a book). If you've been buying every recommendation they've given you for the past year, you're going to be down 50% from where you started. That's what happens in a recession. The knife is still falling and will continue to until the nation regains confidence. If you try to catch a falling knife when it's got a heavy weight behind it, you're going to get cut... well your money is at least. If you think just because they recommend a stock that means you're going to make money on it right away or in the middle of a recession you're either retarded, a Hillbilly that never finished getting their GED or you just shouldn't be investing at all. These recommendations are mostly stocks to buy and HOLD so that once a bull market makes a comeback (who knows when that will be), these stocks will rebound better than most stocks out on the market (If you haven't checked, their recommendations are doing much better than the market itself). Don't blame Fool.com because you don't understand the basic concepts of investing. If stocks give you too much of a tummy ache and you're selling them once you've already lost 50% of your money try out some nice mutual funds or ETFs.

P.S. If you still want to go on and make blind thoughtless investments, please be my guest. You're only helping me build my own wealth. Happy trading! :-)

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Report this Comment On February 27, 2009, at 4:48 PM, truthisntstupid wrote: I can't hope to say it better than joeybalz

most of you whiners had no business subscribing to a newsletter til you first invested that same money in a copy of "The Intelligent Investor", some good books on dividend investing, and maybe at least a first-year college textbook on accounting principles.

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On February 27, 2009, at 4:49 PM, garyanton wrote: My own approach is to only invest in securities which yield substantial dividends or interest - i.e preferred shares, income trusts, MLPs, CEFs, bonds, etc. I avoid common shares because of what many people above have complained about - I have no idea where "the market" is heading. While portfolio values can still get crushed if companies fail to pay a dividend or go bankrupt (I held both Lehman Bros bonds and Freddie Mac preferred shares and incorrectly thought they were utterly solid), overwhelmingly companies continue to pay. Yields right now are often extraordinary and the steady, generally predictable cash flow sure beats the guesswork of timing the market.

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Report this Comment On February 27, 2009, at 5:25 PM, biglittleone wrote: My first stock purchase was in 1952. Anyone have earlier first exposure to risks of markets?

I sold it before being drafted into the army in 53. Next purchase was after graduating from college in 1960. Still have some of the ofspring of this purchase.

Since then I have had many more gainers than losers.

I will probably buy some more in the next several weeks.

It helps to be debt free in a paid for house.

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On February 27, 2009, at 5:41 PM, rwk2008 wrote: Most of us (including me) have tended to give stock pickers far more credit for clairvoyance than they deserve. TMF doesn't know how the market will behave, doesn't know which stocks have solid base and which are mostly hot air. TMF picks a few stocks they THINK might perform better than the market in the short to medium term (think a month or two to a couple of years). If the market drops 50% and their stock drops 45%, in some limited sense they were right. When everything was booming, and bubbles were expanding, it wasn't hard to be a hotshot stock picker. In today's market, it takes a lot more digging and long-term perspective to get it reasonably right most of the time. And you don't get that with a couple of guys pumping out lots of stock picks every week.

One thing to remember - unless you think the market is going a lot lower, don't be a net seller of stocks. If you expect a recovery in the next year or two, pick some stocks YOU expect to hold up and do well, and put some money into them. They probably won't be the ones that have almost completely collapsed (like CITI, BofA, Fannie and Freddi, and GM). They also may not be the ones that have dropped less than the rest. You have to consider the source and value of the advice, and make up your own mind. Remember Warren Buffet took a loss on Level 3, Bill Gross is surprized at the dept of the recession, and Peter Lynch had big bucks in AIG last year. And most of the multi-million per year investment bankers were betting on toxic real estate 'securities' up until last summer. Nobody gets it right more than about 2/3 of the time.

I see a lot of posters who want to bring the neo-con republican wing nuts back to run Washington. Hello! What part of ran the country into depression do you not get? If a republican tells you it is night, go to the window and check. They haven't been right for a long time, probably since Teddy Roosevelt left office. They've given us two major depressions in less than 100 years, and they still haven't given up on trying to kill social security, medicare, and the American labor movement, three of the progressive ideas that made our country great and built the middle class most of us are a part of.

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On February 27, 2009, at 9:56 PM, InvestingShar wrote: It seems that there fewer and fewer real investors left in the world every day now. But there are so many gamblers!..Buy today hoping it's going to go up and sell tomorrow to get some return in case it'll go down.

These are shares of the company we are talking about here. We are owning part of the company!

A lot of speculations, a lot of misleading information, a lot useless articles, a lot of bad news out there right now.

But the true investor beleives in the concept of the stock market, the concept of trading, the concept of investing. The true investor buys value cheap. And this is the time, gentlmen! This is the time to get on the board, fasten your setbelts and enjoy the journey for the next 2-5 years. And once the world economy is telling you: It's going good. - you have to sell everything you've got and wait for the next time like NOW!

Why selling is a common problem

Why selling is a common problem

Published: 2009/02/04

Most investors tend to agree that the decision to sell a stock is one of the most difficult to make. Sometimes it is more difficult to decide when and what to sell than to buy. Ever wondered why?
* People tend to sell winners too soon and hold on to losers too long
You will find that regardless of whether the market is running hot or is coming down, there are still a lot of people out there who either sell their stocks too early only to realize that the prices continue to soar, or hold on to losers for too long only to see them continue to bleed further.
From a behavioural finance standpoint, this phenomenon is held by Hersh Shefrin and Meir Statman (1985) as the "disposition effect". This was discovered from their research entitled, "The disposition to sell winners too early and ride losers too long: theory and evidence".
Based on research, individual investors are more likely to sell stocks that have gone up in value, rather than those that have gone down. By not selling, they are hoping that the price of the losers will eventually go back to their purchase price or even higher, saving them from experiencing a painful loss.
In the end, most investors will end up selling good quality stocks the minute the prices move up and hold on to those poor fundamental stocks for the long term, while the performances of these stocks continue to deteriorate.

* People tend to forget their original objectives
In stock market investment, there are two types of investment activities, trading versus investing. Trading means "buy and sell" while investing means "buy and hold". The stock selection criteria for these two types of activities are entirely different.
Most of the time those involved in trading will choose stocks based on factors which will affect the price movement in short term, paying less attention to the companies' fundamentals whereas those involved in investment will go for good quality stocks which are more suitable for long-term holding.
However, you will find that many people get their objectives mixed up in the process. They get distracted by external factors so much so that some panic when the market goes in the direction that is not in line with their expectation, and as a result, end up selling the stocks that they find too expensive to buy back later.
On the other hand, some force themselves to change the status of the stocks that were originally meant for short-term trading into long-term investment as they are unable to face the harsh fact that they have to sell the stocks at a loss, even though they know that the stocks are not good fundamental stocks that can appreciate in value.

So, when to sell then?
There are few different schools of thoughts on this. Based on the advice from the investments gurus, like Benjamin Graham, Warren Buffet and Philip Fisher, when you buy a stock, you need to make sure that you understand the companies that you are buying, and these are good fundamental stocks, which will provide good income and appreciate in value in long term.
Therefore, you will be treating your stock purchase as a business you bought, which is meant for long term. You should not be affected by any temporary price movement due to overall market volatility.
You will only consider selling the company if the growth of the company's intrinsic value falls below "satisfactory" level or you find out that a mistake was made in the original analysis as you grow more familiar to the business or industry.
However, if you find that your investment portfolio is highly concentrated on one single company, then you might want to consider diversifying your portfolio and lowering your risk.
Any single investment that is more than 10 per cent to 15 per cent of your portfolio value should be reconsidered no matter how solid the company performance or prospect is, suggested Pat Dorsey of Morningstar.
Last but not least, if you find that by selling the stock, you can invest the money in a better option, then that is a good reason to sell.
In summary, successful investing is highly dependent on your self-discipline, taking away the emotional factors and not going with the crowd. It should always be backed by sound investment principles.
Always remember there is no short cut in investment, only hard work and patience.


Securities Industry Development Corp, the leading capital markets education, training and information resource provider in Asean, is the training and development arm of the Securities Commission. It was established in 1994 and incorporated in 2007.

http://www.btimes.com.my/Current_News/BTIMES/articles/SIDC2/Article/index_html

The Anxiety of Selling

THE ANXIETY OF SELLING

A vexing question facing investors during market sell-offs is whether to join the pack. For value investors, the answer is no, but the more pertinent question is when to sell.

Value investors set selling criteria at the time of purchase. Their attitude in buying is to select stocks that are least likely ever to trigger the criteria for selling.

But businesses change, and when they deteriorate, their shares should be sold, just as the owner of a business sometimes must decide to close down. When selecting stocks, value investors specify what deterioration means for purposes of selling. The logic is simple: The same factors used to select and avoid stocks are used to decide which stocks to sell and when.

Sales are indicated when the key factors supporting an original buy are gone. Here is a summary of such factors:

(1) Internal:

• dubious management behaviour,
• vague disclosure or complex accounting,
• aggressively increased merger activity,
• dizzying executive compensation packages.
  

(2) External:

• intensifying new competition,
• disruptive technological onslaughts,
• deregulation,
• declining inventory and
• receivables turns.
  

(3) Economic:

• shrunken profit margins;
• declining returns on equity,
• assets, and investment;
• earnings erosion;
• debt increased aggressively in relation to equity;
• deterioration in current and quick ratios.
  

Value investors avoid selling when bad news is temporary. Single-quarter profit margin slippage should provoke questions, but not sales orders. If investigation shows deeper problems, then the condition might be permanent and selling indicated. Permanent deterioration requires more evidence.

When in doubt concerning where deterioration is temporary or permanent, value investing might include a hedging strategy. This would call for selling some but less than all shares held.

Value investors never sell solely due to falling prices. They require some evidence related to the declining intrinsic value of the business to warrant a revision in the hold-or-sell calculus. Stock price fluctuations are far too fickle to influence such an important decision.

In the case of a preset policy to sell when price reaches a certain high level, many value investors follow the same mixed strategy adhered to when unsure whether a development is permanent or temporary: selling some, but not all.

Also read:

1. Stock Market Prices
2. Market metrics P/E and Intrinsic value
3. Rational Thinking about Irrational Pricing
4. The Anxiety of Selling
5. Control Value of Majority Interest

Stock Sale Considerations (Part 2 of 5)

B. WHY ARE YOU CONSIDERING A SALE?

REASONS CONSIDERATIONS

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Not so good reasons
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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)
http://myinvestingnotes.blogspot.com/2008/08/stock-selling-guide-part-3.html