The Question No One Ever Asks: When To Sell Stocks – The Complete Guide
Investors spend all their time on when and what companies to buy, but spend virtually no time at all on when to sell stocks. If you talk with the most astute investors alive, you will see that even they have a hard time pinpointing and accurately defining a strategy on the subject. There’s a reason for that: there isn’t one.
In the same way various investors use a myriad of metrics, analyses, and due-diligence processes in order to determine where to invest funds at; selling stocks is open to much interpretation as well.
When it comes to selling stocks, it seems that there is a small amount of available education.
With regards to buying stocks, any investor can lay out his exact strategy and explain it thoroughly – the same cannot be said about selling.
No one has quite mastered the art of selling stocks. Maybe it’s because there are six types of stocks. Investors sometimes own a stock for a year and it performs poorly, and right when they decide to sell it, the stock begins to over-deliver. Another example that happens quite often is when an investor sells a well-performing stock and it just keeps on performing in a super-profitable manner.
There are three main periods of time when an investor should consider selling a stock. The underlying theme of all three is that a stock is a portion of a whole business, so by selling, an investor sells a business he owns, or a part of his ownership, if he decides to sell only part of his stocks.
Imagine you own three fields. You go to the store and pick out the best 3 types of seeds the store owner suggests, after you do your own research. You take the three types and sow them on the three fields.
The first field grows perfect harvest.
The second field grows good harvest.
The third field doesn’t grow a good harvest.
You see, picking the best seeds didn’t guarantee all three fields would produce a bountiful harvest. Sometimes a lazy farmer, bad weather, birds, thieves, and other things come into play, and your initial projection isn’t quite like the end result.
This story depicts most stocks. Some are phenomenal investments and others are good, while the rest are not.
In our Classic Issues division, we profile companies that are like a perfect harvest. These are the top stocks to own over the long-term. These are stocks that, unless one of the reasons I mention below occurs, you would want to own forever.
Contrary to farming, the investing world is much more complex and dynamic. What appears to be a bad investment at first can actually turn into a great one, and a perfect investment can turn to a mediocre one.
The analysis at Wealth Research Group has led me to follow a number of principles that I am comfortable with. It took many years of personal experience, speaking with top investors, reading a mountain of books, and common sense to arrive at a winner’s approach to selling.
There are six types of stocks, so the reasons to sell them are entirely different. Let’s break them down into 2 groups:
Long-term core investments – Compounding Machines.
Short-term smart speculations – Steroid Stocks.
Long-Term Core Investments – Compounding Machines
The stock market is an incredible wealth machine.
When you own the best businesses, the return on investment is remarkable. Consider this chart and what it means – stocks are the greatest compounding vehicle there is. Stocks that return 6.6% or more over the long-term are exactly what we are looking for.
The reason to sell long-term investments is when the company whose stock you own is not able to keep generating returns because the competitive advantage is deteriorating. This is the main reason to sell: when the company is losing market share, products are no longer relevant, margins are decreasing, dividends are cut, costly turnaround plans fail, and you, the shareholder, are the one suffering.
The second reason to sell a long-term investment is for sophisticated reasons. A combination of tax benefits and alternative compelling investments. If one of your stocks is a losing position and the competitive advantage keeps weakening, you can sell it and offset capital gains tax from your winning trades and reallocate the capital to more attractive stocks. This is a great strategy, as taxes are a huge expense for long-term investors. Taxes, like investments, compound.
In general, the longer you hold a stock, the less risk you take on. The reason is because the stock market is governed by emotions in the short-term and by immutable fundamentals in the long-term.
Short-Term Smart Speculation – Steroid Stocks
This group of stocks is incredibly volatile, and the time to be speculating is when valuations are rock-bottom and expectations are low.
For example, look at the TSX Venture at the beginning of 2016, when Wealth Research Group was launched. I was pounding the table with regards to Steroid Stocks – these are mining shares that are truly on steroids, since they can go ballistic in a matter of months. That’s why I released my personal game plan for 2016 – no holds barred for everyone to see.
The reason you want to sell these companies is because these are cyclical industries and you want to own them during boom times only.
Contrary to long-term investments, such as Abbott Labs, which we wrote about in “Make a Fortune From Cradle ‘Til Grave,” resource stocks should be owned until they become popular and sold for a wild profit.
We profiled two companies in July and August that doubled within 14 days. So the reason to sell short-term Smart Speculations is in order to take profits.
Right now, Wealth Research Group is focusing on resource stocks most of all.
The tiny purple line shows just how early we are. We will be sellers on the future, but right now, our free members are receiving Time-Sensitive Email Blasts regarding the few select stocks we believe are set to explode. The research was done on 758, and we ended up with 10 that will be big winners.
This chart basically shows when it is a good time to speculate and when it is better to add core long-term investments. As you can see, we now have a huge opportunity for life-changing returns.
Then, close to the top, we will be selling, but we have a clear tarmac ahead for at least 3-4 years.