When is it time to sell a stock?
Selling a stock can be the most difficult decision an investor makes, says this U.S. advisory, which illustrates with the sale of a big winner.
Buying a stock is easy enough, if you have the cash and the conviction.
Holding a stock can be a matter of astute judgment or of simple procrastination.
But selling may be the most difficult decision of the three.
Anyone who has mastered the art of selling stocks at the right time will need advice only on the purchase of a palatial oceanside villa (or whatever one’s dream house might be).
But for most investors, selling is fraught with peril, whether the stock in question has gone down or up.
So let’s get some practical advice on selling from a leading U.S. advisory, Personal Finance.
The editor, Mr. Elliott H. Gue, employs the title “Selling Discipline” because that’s exactly what is required. You must keep your emotions in check and act as pragmatically as possible.
In fact, Mr. Gue wrote the article as he was in the process of selling a very successful stock from the advisory’s Growth Portfolio.
Before we get to the story, we are bound to mention that this Growth Portfolio contains two Canadian stocks: property and power giant Brookfield Asset Management (TSX/NYSE-BAM) and the world’s largest uranium producer, Cameco Corp. (TSX-CCO; NYSE-CCJ).
These are not to be sold. They are both buys.
A far harder decision
Mr. Gue states the case plainly. “I’ve often noted that whether to sell a stock is a far harder decision for investors than when to buy. Investors hate to sell a losing stock for fear that it’ll take a turn for the better as soon as their order is executed.
“And investors are often loath to sell winners for fear of missing out on further upside.”
The most important stocks to monitor, he agrees, are those that are losing money. That has been more important than ever in the crisis-scarred markets of the past few years.
“Nothing has cost investors more money over the past two years than falling in love with a stock and riding it all the way to bankruptcy.”
But winners need nurturing, too.
Staring at gains
It is equally important, says Mr. Gue, “to periodically review your big winners to determine if there’s enough upside left to justify the risk of holding on.”
The fear that you may be tossing away future gains is a powerful incentive to hold on to a winner. But there are times when discretion is the better part of valour, or greed.
So this editor stared a gain of 85 per cent square in the face, and sold.
The stock is Google (NASDQ-GOOG). And the decision to sell was not an easy one. While its competitors are stepping up the competition, this Internet giant goes from strength to strength.
Indeed, Mr. Gue points out, while many other firms that depend on advertising suffered during the crisis, Google held its ground.
Its search advertising business is improving rapidly. “Most companies cut their advertising budgets in 2008 and early 2009, but they cut television, print and radio buys, where far more money is spent than online.”
Google’s online advertising is much easier to measure than more traditional forms, says Mr. Gue. And it’s not nearly as costly as a TV commercial or a glossy magazine spread.
And there is excitement about other initiatives, he adds, like the advertising potential of YouTube, a line of mobile phones and Google Docs, programs that are set up to compete with Microsoft’s Office software.
OK, but all this sounds like a reason to hold the stock. Why sell?
An impressive profit
“When I recommended Google in March,” explains Mr. Gue, “the stock traded at 18 times earnings and was pricing in a great deal of bad news. Although Google’s search advertising is more effective than other modes, it’s still advertising.”
One of the first things to get trimmed in an economic slump is the advertising budget. “At that time, any piece of good news would have been sufficient to send the stock sharply higher.”
And so it turned out. By the time Christmas rolled around, the stock had nearly doubled and it was trading at 31 times trailing earnings and 26 times full-year earnings estimates. “That higher valuation represents rising expectations for the stock,” says the editor.
“I suspect Google’s earnings will continue to improve, but a single weak quarter could be enough to send the stock sharply lower.”
In short, Mr. Gue felt it was time to take an impressive profit off the table. Why scramble after further gains with a stock that seemed fully valued, and might just take a plunge?
In fact, the stock, which did rise further after it was sold, is in the midst of taking a hit today as the markets falter. At this writing, Google has lost almost $8 in a few hours. It trades at $593.
The stock is bound to snap back, but Mr. Gue is not liable to be uncomfortable with his decision. After a big gain, an element of doubt about the stock had crept in.
There are many reasons to sell, and locking in enormous profits is scarcely the worst of them.
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