When To Sell Your Stocks
There is an old saying that says, "any fool can fly, but it takes an expert to land".
Applied to stocks, we say, "any fool can buy but it takes an expert to sell".
Of course, I mean sell profitably. Any fool can get lucky but if you aim to make profits consistently in the stock market, you've got to be an expert at selling.
It never ceases to amaze me how badly many private investors' portfolios perform. To see why they perform so badly, we need to look at the way they have managed their portfolios. Consider this chart showing the "progress of a loser", as the stock he bought refuses to behave the way he expected it to.
Read about uptrends and downtrends first if you need to.
Naturally, some of the stocks in investors' portfolios rise and some fall - there is nothing unusual about that. Many first timers are surprised when I tell them it's selling decisions that differentiate the winning portfolios from losing portfolios.
Why should this be?
Losers hate to sell stocks that are falling. They don't like the idea of making a loss. Instead they sell their rising stocks and say "Hey, I'm good at investing - I'm making a profit". They then hold on to their falling stocks, hoping they will rise again. Unfortunately, most stocks fall because they are poor value. Once a stock enters a downtrend, the chances are it will continue to track downwards for a considerable period of time.
When their stocks continue to fall, losing investors put these stocks into the "bottom drawer". They wait - sometimes for years - for the stock to come back to the price they paid for it. Sometimes the stocks don't come back. They keep falling right down to zero. The loser does not limit his loss.
Winning investors are ruthless when it comes to weeding out poor performers. They only want to invest in winning stocks. They buy stocks that are trending upwards and hold onto them while the uptrend lasts. If the uptrend stops, they sell. Often this will be at a profit. There will also be losses. The key to winning, however, is this: winning investors limit their losses. They never suffer big losses. If a stock performs poorly, they sell. Compare this approach with the loser who holds onto his downtrending stocks indefinitely and can lose 100 percent of his invested funds when stocks go to zero. Trust me, I know. In my early days as an investor I clung, limpet-like, to three stocks right to the end. The end was $0.00. I have never made that mistake again.
Market trends are real. They have statistical significance. Provided you are disciplined in executing your strategy, trends can be ridden profitably. Ride your gains for as long as an uptrend lasts. Some uptrends last for years, lifting the share price by multiples of five, ten or twenty. You only need to ride the trend with one or two big winners to underpin a hugely successful portfolio. It's crucial you allow your gains to be unlimited. You must not sell while a stock is trending upwards. When an uptrend ends, sell. You will then have given yourself every chance of becoming a successful investor.