I'm going to be completely lazy and start off this post by quoting myself.
"Is there anything harder in stock investing than deciding when to sell? Either you have a winner, and would like to be 'prudent' and take some profits, even though you risk giving up on even greater profits. Or you're stuck with a loser, and 'prudence' calls for cutting your losses, though that entails buying high and selling low, a surefire way not to make money.
And, sure, they are just pieces of paper, but you love these stocks. You don't want to abandon them when they've been so good to you, or are going through some hard times."
Sounds like there's some lessons to be learned...
I've already written about the good and bad of the stocks I've sold, which has led to these proposed principles for selling a stock:
1) Know your decision points, and stick to them. Note that the decision can be hold or buy more, and not just sell.
The decision point I use is when the stock falls one-third from its high, during the time I owned it. I decided on one-third because I don't want to fret over my stocks if they have a few bad days - I want to give them ample room to operate in what is now, and will be for the foreseeable future, a volatile market.
Furthermore, I decided on letting all my stocks fall one-third before I decide what to do with them, because just like the bottoms, I can't call the tops either. I'd rather let the market carve out a top for me, and risk losing some money, than attempt to call out a top, be wrong, and miss out on even greater gains.
Both of these strategies have the added advantage of reducing the burning of cash on commissions, which although they have dropped greatly over the years, are still significant at the levels I trade at. If you are trading larger dollar amounts, you can probably tighten up the percentage, and/or make incremental trades.
One important exception to these rules: a stock that goes sideways for an extended period of time. There's nothing more irritating about investing than when a stock is bought, and it just does nothing. I say the decision point is one year of sideways trading, then revisit it.
2) Re-examine the buy-side story all over again. Once a decision point is reached, use a fresh buy-side analysis to determine whether to sell, hold, or buy more. Are the fundamentals still intact? Has the bear or bull case strengthened or weakened? Has management changed its outlook? Have existing competitors stepped up their efforts, or new competitors broken down the barriers of entry?
I like to frame the decision like this: if I didn't own the stock already, would I want to start buying it at current levels? If the answer is "yes", then that's good reason to at least hold, or consider buying some more. If the answer is "not sure" or "no", that's good reason to sell.
3) Try not to panic. Many of my bad sells occurred when the stock had fallen near its decision point, some bad news had pushed the stock down below the decision point, and I shot first and asked questions later. When it turns out the bad news was short-term or inconsequential, the market was actually doing me a favor and giving me a great buying opportunity - yet I did the exact opposite and sold.
Given that panicking is sort of an involuntary response, this is a tough rule to stick by, but I still think its a worthy aspiration.
4) Don't fire and forget. I keep an eye on all of the stocks I sell (obviously), trying to evaluate whether the decisions I made were right or not, and hopefully apply those lessons to the next decision point. Also, it's fun, in a strange sort of way, to watch a stock I sold plummet. Petty fun, but fun nonetheless.
I think the bottom line here is that success in investing is all about planning and execution. And, hopefully, the past can influence the future for the better.
