Tuesday, September 04, 2007

When to Hold and When to Sell:

Hold when: The price changes

Price changes, up or down, don't change a company's fundamentals.
If you sell simply because the stock's made you 50% in a short time, you're potentially throwing away a much bigger long-term profit.
If the price goes down on no news, the company becomes more attractive, not less. So, it doesn't make sense to sell simply based on price changes

Hold when: Temporary bad news comes
Bad news will come to every stock, sooner or later.
The company will miss estimates by pennies but fall by dollars. In itself, this isn't a reason to sell.
If the factors are temporary and in the long term the business is still strong, it still makes sense to hold, or even buy.

Sell when: The stock is overvalued

If a great stock's fairly valued, then it generally makes sense to not sell it.
You'll likely know that company better than any new company you add to your portfolio, and it's hard to find great companies at cheap prices, so you should naturally be reluctant to give up the ones you have.
But if the company becomes extremely overpriced, then it's time to jettison it,it will be unlikely to earn spectacular future returns.

Sell when: The business changes
If you're buying a great business, and suddenly you notice that the business isn't actually that great anymore, it can make sense to sell.

Sell when: There's a better stock to buy
If you're short on money but see an incredibly compelling stock that you absolutely must own, then sell a less attractive stock to raise funds.
But before you make the switch, make sure that you take into BROKERAGE costs and TAXES.
Often it won't make sense to sell a company in which you have large returns,pay the taxes, and put the proceeds into a marginally more attractive stock.

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