Newspaper article Sarasota Herald Tribune

It's Harder to Know When to Sell Than When to Buy

Newspaper article Sarasota Herald Tribune

It's Harder to Know When to Sell Than When to Buy

Article excerpt

BACK IN SEPTEMBER, I WROTE a column on one way to select stocks for a portfolio. In some ways, deciding to sell a stock is much harder, because it involves both emotional barriers and technical issues.

Typically, when buying a stock the emotional factors are positive. The investor is enthusiastic about the stock's prospects and excited to own a piece of a great company at a reasonable price.

But when deciding to sell a stock, the emotional factors are more complex. If the stock has fallen in value, there is regret and the difficult admission that the purchase was a mistake. Essentially, this means giving up all hope for the stock by transforming a paper loss into a realized loss. And if the stock has risen in value, there's the fear the investor is making a mistake by selling too soon.

Successful investors put these emotions aside and make a rational decision on fundamental factors like what's changed about the company's prospects.

Warren Buffett states this in a different way. He said, "Our favorite holding period is forever." He has also been quoted as saying, "If you don't feel comfortable owning a stock for 10 years, you shouldn't own it for 10 minutes."

The strong message: Don't buy a stock you can't see owning for many years and, when you sell, do it rarely and for well-defined, quantifiable reasons, not out of fear.

But even Buffett wouldn't disagree with the statement that "things change." That is, even a company whose prospects and management team seemed superior can run into problems that will be significant and long lasting. Thus, even Buffett has sometimes found that the right decision is to sell a stock rather than to hold it.

So the question is: How does an investor recognize these signs and make a reasoned rather than an emotional decision that a stock is a possible candidate to be sold?

Perhaps surprisingly, the process starts at the time the decision is made to buy the stock: It follows from the analysis the investor did when making that decision.

It's my view that investors should base their decision to buy a stock on its fundamentals. One key component of that analysis is determining the stocks "intrinsic value" -- what the stock might sell for in an ideal world under a specific set of assumptions on fundamentals such as earnings, dividends and risk. …

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