When to sell? When you want to. When you need to. Okay, let me be more specific than that, even though those two short sentences are wonderfully concise. Of course, I am talking about when to sell stocks; but, the topic applies to many aspects of life. Remember that line from The Matrix? “Everything that has a beginning has an end.”
Deciding to start an endeavour can be a colossal chore and event. Sustaining it and maintaining the process usually takes less effort. It’s like having a pile of rocks delivered to your house. You know you want to build a rock wall. Deciding which Saturday morning to devote to it may take months. Finally trying to budge one of them takes a lot of grunting and sweating, but after it’s moving, it may roll along on its own. Knowing where and how to stop it though is what’s required for getting what you wanted.
I started investing decades ago, so those first hurdles are long cleared. Recent economic realities mean that my plans for a life of secure comfort have been delayed. So it goes. But effectively, by having invested in stocks, I’ve set a lot of energy in motion. Granted the motion is currently slow, and sometimes rocks back and forth, but things are moving and they are, in general, heading the right way. Some day I will have built a life that is even better than the one I enjoy today. For that to happen though I have to keep in mind that at some point I’ll probably have to sell at least some of the stocks. Knowing which stocks to buy is an exercise in imperfection. Knowing when to sell them is equally daunting.
I’ve had many reasons to sell stocks.
I no longer believe the company will succeed. (Sad, but true.)
I think another company is more likely to succeed. (Sad, but true.)
I think the stock’s price is far above it’s probable value. (Maybe they’re right, but I’m out of here.)
A stock position is large enough to possibly, dangerously unbalance my portfolio. (Not always a bad thing.)
I’ve made enough money. (I haven’t actually done this yet, but I’m hoping.)
Sometimes I have to sell just to pay some bills. (A very common occurrence.)
That last scenario exists throughout the market and is the reason why there is almost always a seller in every stock and why every stock has a tendency to drift down if there isn’t uplifting news.
Allow me to point out some specific wording: believe, think, possibly. These are waffle words, subjective judgments. I have few definitive statements to make about selling, or investing for that matter. Without being able to predict the future everything is, at some level, a guess. The main thing that isn’t a guess is having to pay the bills. Even “having enough”, sustaining a desired lifestyle, is a guess because it involves guessing that desires and realities won’t change significantly. Also note that I didn’t use the word taxes. I’ve only sold for tax purposes a few times and each time the sale was coupled with one of the other scenarios mentioned above.
I’ve sold when I thought the company would not succeed. Sometimes I did that after everyone else realized it and I lost a lot of money. Oh IRIDF, why didn’t I listen to my friend’s comments about your debt load? Sometimes I did it early, when something about management, logistics, marketing, or competition was unsettling. I liked HOOK very early, until they made a deal with Anheuser Busch that seemed counter-productive and they decided to expand into the northeast without appreciating that region’s different labor culture. I got out at about the right time then. I’ve also jumped out because of management changes. I sold AAPL when they kicked out Steve Jobs. That story’s more complex.
I’ve sold when I thought other companies would succeed. Competition happens. That’s been especially the case with computer hardware and software. Dynamic industries may eventually include icons, but during their early growth spurts many more companies sprout and either wither, fade, or get absorbed. Anyone else remember Massachusetts Computer Company?
I’ve sold when I thought a company’s stock exceeded its value. I did that with FFIV. I was wrong because I misinterpreted one of their annual reports, but I acted upon the math, not the emotion. Fortunately, I didn’t sell everything that time and a stock that I bought for about $5 went to $90. I sold when it had grown ten-fold and made a down payment on this house, my favorite home. Since then FFIV has split and closed recently above $126, or $252 adjusted for the spilt. Such is investing. I didn’t make as much as I could have, but I made a very nice return and got something very nice in return.
Anyone that was invested during the Internet boom prior to the bubble can recall stocks that far truly outstripped the value of their companies. Exuberant investing may be hard to recall, but exuberance is a human emotion heightened by social contact, that can take any issue beyond logic and reason. I’d like to tell some marvelous tale of selling at that peak, but I was in there with the rest. I sold some there, but bought others. Partly from exuberance, partly from personal doubts mixed with the possibility that others knew better, and partly from relationship communication issues, I didn’t sell and hold. Lessons learned. I hope.
Selling to rebalance my portfolio has occurred so often that the examples are too many to mention. Usually though the sale happens from an unbalanced portfolio coupled with one of the other concerns or the desire to use the proceeds for bills or a house downpayment. Even now, with DNDN representing the majority of my portfolio, most of my DNDN sales have been to pay bills; though there have been a few slivers shaved off to buy into other positions that are downtrodden (MVIS, RSOL). Selling high in one stock to buy low in another is a marvelous way to grow a portfolio, but care is required because there’s never a guarantee that the purchased stock won’t go lower.
The clearest sell signals I’ve received have been from acquisitions and mergers. I invest in small companies. Sometimes they are bought by much larger companies. Pixar was bought by Disney. Lands End was bought by Sears. QFC was bought by Fred Meyer, or was it Krogers? My life is easier when I am only trying to track simple companies. Pixar made animated movies. Disney has that plus theme parks, television networks, and enough divisions to warrant hours of research. I sell when the stories get too complicated. Besides, the success of a small company can drive its stock price rapidly, but the same success can be lost within a behemoth. I’ll take the greater gains and leave the greatest gains for the professionals and the greedy.
Buying stocks is one possible first step to making money (and remember that losing it is also a possibility), but for me the goal isn’t financial excess. My goal is a sustained, healthy, fun, and long life. Selling the stocks wisely after buying them wisely, with a bit of luck thrown in, is how that can happen.
PS After I wrote this I realized that I covered this in more detail in the chapter titled “Managing and Harvesting” in my book, Dream. Invest. Live. Some topics can always be repeated.