There you go again Mr. Market … You’ve trumpeted your tempting sirens and lured in people who were deathly scared of the stock market to now jump in. The S&P 500 is once again flirting with all-time highs but is the music about to stop? You make it easy to buy a stock but why is it so hard for you share the catalysts that tell investors to sell? Mr. Market is famous for encouraging you to sell with emotion but isn’t there a better way?
In our opinion, there are three main criteria that should be used in forming a disciplined and repeatable sell decision. In order to be a successful investor you need to master and take them all into account before you ever buy a stock.
So…what are the three main criteria?
- Fundamental Analysis: There are a slew of fundamental issues that could warrant a sell decision. If you’re willing to buy a stock you’ll need to monitor fundamental metrics ranging from earnings, valuation, cash flow, and debt, among others. Lumped into this category should be a keen awareness of key changes in management and their effectiveness.
- Technical Analysis: Whether you believe in following the charts and trading patterns of a stock or not…you still need to be aware of them. Like it or not, many decisions from the bulk of the investing world are made or triggered due to technical analysis so even if you think it’s hogwash don’t be short-sighted and ignore them.
- Investor Sentiment: Ideally, you’ve kicked the tires and performed your due diligence (reasons #1 and #2 above) on what made you buy the stock in the first place. If the honeymoon phase is no longer there, it may be time to sell. Don’t get us wrong here…this is not about selling because everyone else is. The idea here is to analyze whether the trend is moving in a direction that is not going to help you as a shareholder. Of the three criteria this is perhaps the most challenging to master because it forces you to use your eyes and brain as opposed to your emotions.
We’ve now given you a brief but forever handy set of rules to improve your sell discipline on every stock you own. That being said, sometimes there are reasons to sell a stock even if none of the above mentioned criteria are met. Aside from liquidity needs or broader asset allocation driven decisions, there are times when it simply makes sense to sell a stock. The following are a few situations where this may come into play:
- Taxes: There are times when your portfolio is begging to be treated better by Uncle Sam. If there are two stocks in your portfolio that have not met any of the above “sell criteria” but could potentially help you from a tax standpoint…take advantage of it! For example: If it’s close to year-end and one stock is down -40% and another is up about the same percentage, sell them both! We’re not CPA’s but you don’t need to be one to take advantage of the Wash Sale Rule. After 30 days (assuming you still have faith in the two stocks that were sold) buy them back. By doing so you’ve essentially reset your cost basis and also offset a taxable gain with a loss. Win…win.
- “Garage Sale Syndrome”: Go ahead and do a Google search for this term. It’s doubtful you’ll find anything about it because it’s our deep dark investing secret. Truth be told…it’s more like an observation after seeing over 20 years of investor accounts that don’t seem to have a clear strategy behind them. Why is it so hard to clean out our garages sometimes? Perhaps there are emotional attachments to items we once enjoyed? Maybe we think we’ll “use it or need it again one day”? When it comes to your investments, however, these feelings (that’s really what they are) need to be scrapped. Rip off the Band-Aid and sell stuff that isn’t moving the needle on your portfolio.
- Profit: You’ve heard us repeat the old adage that “you can’t go broke taking a profit”. If a stock completely surpasses all expectations in a short time frame or for reasons other than why you initially bought a stock….don’t be afraid to part ways and lock in a profit! In a perfect world we think sell decisions should be driven by asset allocation adjustments or one of the three criteria we’ve identified earlier in this article. To help paint a clear picture of this we’ll give you a very current example:
Not too long ago we bought Target (TGT). Without going into all the details the basic premise for owning the stock was due to it being:
(1) Depressed in price (2) an industry leader relative to many of its peers (3) overly punished with some bad PR and news events (4) exposed to near-term pressures from competition and market expansion (5) for those investors who patiently waited for a turn around they would be rewarded with a healthy dividend yield of almost 3%.
Target (TGT) is now up over 31% in just the past six months. Once we receive the recent
quarterly dividend it will be time to enjoy these profits that came at a far faster clip than expected. Of course the stock could continue to march higher but knowing that we achieved our profit goal at almost five times the return of the S&P 500 during that same stretch allows us to not look back.
If you liked or learned anything in this article don’t keep it a secret! Believe it or not, most people have no idea how to gain the proper discipline in selling a stock. Go ahead and share this on whatever social media platform you favor. (Facebook, Twitter, Pinterest etc) Someone will be glad you did!