Tuesday, February 5, 2013

The Million Dollar Question: When to Sell Your Stocks?

Part of the objective of this blog is to teach you about investing and proven ways in which you can go about picking quality stocks. However, the reason why we invest is to eventually sell and make money, right? Well, when is the right time to sell? That is the infamous million dollar question for which many have an opinion and the truth is, the answer depends on each individual investors personal goals and investment or trading approach.
One way to find your answer may be by asking yourself this question:  “Am I a trader or an investor?” Believe it or not, there is a huge difference!
A trader looks at stocks as short term ventures and the main goal of a trader is to buy and then sell as soon as possible just to make a quick profit. Sometimes the trader may be wrong about their decision to enter a position and sometimes they may be right but a trader is a risk taker; they could care less about a company’s future prospectus and much less about balance sheets or any kind of intensive research before entering a stock position. A trader can hold on to something for 5 months or 5 minutes.
An investor, on the other hand, truly cares about the company and is there for the long haul (meaning longer than 1 year). One of the most famous investors of our time is Warren Buffet. He has been asked this very same question in the past: How long should we hold stocks for? Well, his answer was “forever”.
I consider my approach to be very similar to Warren Buffet’s. One of his approaches is to choose corporations that have been around forever, IE: Coca Cola, and sticks around for the long haul because he knows the company is likely not going anywhere. If you are the type of investor that likes to pick speculative stocks, the decision of sticking around “forever” may not be the way to go. But even if you pick crème of the crop stocks, the truth is that most of us will want to cash out eventually because if we don’t, what’s the point of investing, right?! So, when’s the right time?
I want to share an amazing article I read recently in Kiplinger’s March 2013 issue:

The article was in reference to this very same topic. When should we sell, if ever? The piece was written by James K. Glassman. In his article, “The Art of Selling Stocks” he provided some very insightful information and two key factors on when one should consider selling our position in a particular company:
1.    Sell because something has changed for the worse—Here, Glassman makes reference to the book “Common Stocks and Uncommon Profits” where Phillip Fisher writes that one should only consider selling stocks if the company’s underlying business is deteriorating. For example, a change in procedures that may be hurting the company or a change in management which can bring uncertainty. This is why it is important to keep your eyes and ears attentive for news relevant to the companies in which you are investing. This doesn’t mean you should pull the trigger as soon as a change happen but that you have to stay aware of where your money is and any company-specific alterations that may or may not affect the price of your stocks.

2.    Sell because you have to—Eventually we may want to invest in a house, car, a trip to Tahiti, an apartment in Madison Avenue. Whatever the reason may be why you are putting money in the stock market; when the time comes in which you want to put your money elsewhere then, that’s probably a good time to cash out.

If you consider yourself an investor of quality stocks that you see growing for the long term, selling based on its price fluctuations should be the last item on your list of reasons to sell. Focusing on price alone can drive any investor crazy.
I agree with Glassman's view. One point I would add is that if you own quality stocks that pay dividends, you will get paid every quarter for your holdings and those dividends usually go up every year (depending on which companies you are holding). When you are ready to cash out you’ll not only have the profit that you made (hopefully the stock has gone up significantly since the date of purchase) but you’ll also have that extra cash generated by dividends.
To my investors just starting out: If you don’t know what dividends are, I will be writing a post about the amazing world of dividends. Stay tuned!
I personally consider myself an investor. I genuinely enjoy choosing quality corporations, seeing them grow, and growing with them! Don’t get me wrong, being a long term investors also means we have to bear with the volatility of the market but at the end of the day, we are in for the win and fluctuations are no reason to freak out. In the aforementioned article, Glassman also provides an excellent example of Whole Foods (Ticker Symbol: WFM) which has fluctuated anywhere from $90 to $9 and back in to the 90s since it first became a publicly traded company back in 2000. And where is Whole Foods today? The stock is at $94.50 as of 2 seconds ago, as I write this.  
I strongly encourage reading the full article as it opened my eyes to what it really means to be an investor.
Question: When do YOU feel is a good time to sell?
Note: The wonderful people at Kiplinger Personal Finance provided me with a trial subscription of their magazine. However, please note that the thoughs and opinions reflected in this post regarding the article or the magazine are my own.