Devising a Sell Strategy
Over the last year or two, it hasn’t been the ability to pick stocks which has hurt my returns, instead it has often been the inability to pick when to sell. In the best case, I sit on a stock like Apple for twice as long as I intended but come out with similar return. In the worst cases, 20% gains quickly turn into 30% losses like with my Humana trade. Why is this? Well, at least with my more aggressive portfolio (Portfolio A), I attempt to time my sell trades with the end of rallies. Typically, this means I will miss the absolute top but will be able to use my patience to ride an uptrend as long as possible.
A good example of this is my position in China Mobile, the initial investment which sparked my interest in trying to learn to time sells. I bought this stock in the mid-forties and it quickly ran to the mid-fifties before turning down. The trader in me could have quickly sold for a 15% gain in just a few weeks, but the technicals signaled that there may be more to the story. I held on and the stock quickly rocketed to new highs.
Here, the play worked marvelously as I eventually was sitting on a double in my investment. Now, the true sell signal was made about halfway through the above graph when the stock dropped precipitously from its high near $105 and subsequent rallies were unable to attain new highs. Lower highs followed, before the bottom dropped out and the stock fell into a trading range between $70 and $80. (Sidenote: I should have sold near $90, but the markets were in such a frenzy and China Mobile’s fundamental story remained sound so in lieu of other opportunities, I decided to hold on.)
As you can tell, my sell strategy is not very refined as of yet. And, to my own demise, I do not often follow it in a disciplined and stringent manner. The moral of the story as far as selling stocks is that selling for profit is always good. Yes, capital gains taxes can be a pain especially short term capital gains, but just remember if you’re paying taxes it means you made money! Strategies as simple as sell whenever you make $50 or 10% or whatever else work as well as any others. The number one rule of investing is DON’T LOSE MONEY. In the end, compounding will take you just as far as those few home run stock picks. (A lesson I should have learned by now.)
So, for those of you who aren’t simply experimenting with investing strategies in your portfolios as I am here, make sure to take some time and pick a strategy that works for you. The basic principle is to sell when you have realized acceptable return on your investment. Don’t get greedy or feel bad if you “sell early” on a stock. Unless you’re a financial whiz or clairvoyant, it’s very difficult to time the very peak of a stock’s advance. In fact, value investors almost never hit the top as a top often marks the territory of hyper-inflated value based on irrational expectations. Instead, pick your targets realistically and sell when you reach them. It could be as simple as saying to yourself, “I want to make $100 on this investment,” or “10% in the next 6 months is great return,” and sticking to it.
Finally, learn to identify trading ranges and support levels before any purchase of a stock. Then, watch these levels and aggressively cut your losses. A good thing to remember is that, with any stock pick, you’re wrong until proven right. This way you won’t sit on losers trying to convince yourself that your research was good or that the market just doesn’t understand what you see. If you don’t have time to do this, simply give yourself a disciplined stop-loss somewhere around 8-10%. This way, your downside losses will hopefully never be as great as your gains, thus helping you to keep money in your pocket and keep the powers of compounding at work.
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