Every new investor wants to know when you know that you should buy a stock, but it seems like the question is never asked about when to sell stocks. Why is that? Well, to be honest, I think it’s because people think that knowing when to sell a stock is easy – but they’re wrong!
Selling a stock is much, much harder in my eyes. You’re going to sell a stock after one of three situations:
- The stock has gone up
- The stock has stayed about the same
- The stock has gone down
If the stock went up, then why would I sell? Sounds like it’s on a hot streak! If it stays the same that’s just because it’s taking a little longer than normal to really get going and realize it’s full potential. What if it’s gone down? Well, I liked it at a higher price, so I definitely love it now, right?!
See what I just did there? It’s so incredibly easy to find a way to spin it into thinking that the stock you own is primed for success.
Buying a stock is very easy because you don’t have any emotional attachment to that stock. You can simply base it off of facts. Quantitative and qualitative facts – and that’s it.
When you’re trying to sell the stock, you have the added consideration of your own personal attachment and emotion to the stock. Maybe it’s good, maybe it’s bad – but you absolutely have certain opinions and feelings about every single stock in your portfolio, and it’s impossible to ignore them.
In a recent episode of the Investing for Beginners Podcast, Andrew and Dave talked about this in depth (for an entire episode!) and how to try to avoid making a decision that you’ll regret someday by relying on your emotions only.
Andrew gave a really good comparisons that I want to key in on a little bit more. Andrew compared playing poker to investing in the market. There’s a billion different ways to play the game and every player has a different method and style. You could play a poker hand the perfect way, to the book, and still lose because poker is a game that also has to deal with some luck.
You could’ve been dealt the best hand in the world and still end up losing because someone plays a 2-6 and gets a 3-4-5 off the flop while you’re sitting there with Pocket Rockets and a losing hand that before the flop was the best hand in the game!
You played the hand right and things still didn’t work out. Investing is the exact same.
Sometimes you can do everything right and lose while sometimes you can do things wrong and win. The important thing is to stick to your strategy and not deviate from it. If you can stick to the odds by finding companies that are undervalued to their intrinsic value and then selling them only when something fundamentally changes in the business, or the business becomes overvalued, then you’re going to set yourself up with great odds to succeed.
Just as with poker the same is true in investing – if you let your odds get the best of you then you’re going to be in deep, deep trouble. You might make a bad decision and lose at some point and if you try to get extra risky and make it up with your stock choice that has a higher/risk reward potential then you might end up in an ever-bigger hole.
Create your strategy. Stick to it. It’s that simple!
Only sell stocks when they fall outside of your strategy. A good way to think about if it’s time to sell a stock is to try to consider buying more. Would you buy more of that stock? If the answer is no then it could very well be time to sell the stock.
I think that Dave also gave a really good piece of advice – when you sell a stock, move on. Just like you might with an ex – get that out of your brain! Take it off your wish lists and try to avoid looking at it because that could end up being a major pitfall for you. No lie, this happened to me today. I recently sold a stock that I bought around $70 that had dropped to $60 and for the first time in a while, I saw some news about it, so I decided to click on the ticker and see how the share price was doing.
It was over $80.
I was so mad lol. But guess what, you just got to keep on keeping on and not think about the past. If you do that then you’re never, ever going to be able to enjoy what you do have. Did I make a mistake when I sold? I don’t think so.
I think that I stuck to my process and my strategy and I was happy with my decision. Did my decision to sell end up working out? The answer is also no. This is a situation where I think that I followed my process and it didn’t work out.
There are always going to be stations like this in your investing journey because investing isn’t a perfect science. While it is extremely technical, and that’s why evaluating businesses based off their financials is so incredibly important, there is no perfect formula to identify exactly what stocks are about to boom, finding companies that are undervalued to their intrinsic value is a great indicator to show what companies might be primed for a breakout in the future.
The inverse is true when selling stocks. You might sell a stock that continues to go up forever and ever after you sell but if you have conviction in your decision then that’s all that you can ask. Sell the stock and move on. Go find another company that is undervalued and take those proceeds from your sale to invest in the new company.
I’d be lying if I said that it was easy to keep emotions out of your decision, especially if the stock was a big winner for you. It’s so hard to find that point where you think a great performing stock is near the top and then make the decision to cut bait, but that’s why you need to have your process put into place well before you get into that situation.
We’re all going to make mistakes at times, but the important thing is to learn and move on – just as you should do anytime that you sell a stock!