When Should You Sell a Stock?

jehericoplungeGenerally, I hate to sell a stock.  I know that if I sell very often, I’ll end up churning my account, generating a lot of broker fees, and probably doing worse than I would if I had just invested my money into a set of mutual funds.  Remember the whole reason for buying single stocks is to have a chance of doing better than the market.  And the only way to do better than the market over long periods of time is to use the advantage you have – you can buy great companies that over long periods of time will do a lot better than the average company.  Figuring out what a stock will do over a year is really difficult.  It is much easier to find great companies, buy in, and then wait for them to grow and take you along for the ride.

To cut through all of the noise, I try to concentrate on the fundamentals of the company instead of the stock price.  The stock price may drop because people get worried about the economy or because people worry the economy is doing to well and the Federal Reserve will raise interest rates.  I know that if the fundamentals are good, however, eventually I’ll see the price rise.  I really don’t care about the timing.  Rather than watch the price movements, I just glance through the annual reports and read the evaluations in Value Line when they come out every three months or so.  That’s good enough.

Still, sometimes you buy in and wait, but things just don’t materialize.  That may well be the case for one of my purchases, The Container Store (TCS).  I started buying into TCS a few months ago.  I liked that they were a growing company, meaning there were a lot of places they could add stores and increase the amount they were making.

You see, in order for the price to increase the earnings need to increase.  If you buy a stock that makes a billion dollars per year but never increases earnings, you might get some return from dividends but the price will stay relatively fixed.  If you buy a stock that earns $50 M the first year, then $100 M five years later, on average you will have seen the price of the stock double.  So I look for stocks that have room to grow and buy in as if I were really buying into the company, instead of just buying shares of stock.

I originally bought into TCS back in April, paying about $19 per share.  The stock declined, so I went ahead and purchased some more shares the other day at about $10.  Today, some bad news came out on earnings and earnings growth, and the stock plunged about 25% down to $8.12 per share.  So, I am sitting on a loss of about 50% on my total position.  The question is whether to take the loss, use it to offset gains on other stocks and reduce my taxes, and put the money into something else where it can do better.

In making this decision, there is no need to hurry.  The stock has already declined, and I have no idea of how it will do over the next week or month.  It might continue on down, but it may also rebound and reduce the loss somewhat.  Because the entire market fell today, the loss in TCS is also probably somewhat exaggerated.  I certainly don’t want to hold this stock for many more months or years if the company is fundamentally flawed, but taking a week or two to make the evaluation won’t make much of a difference.

I just need to look at the health of the company and their prospects for turning things around.  Is the concept just bad?  Are they not executing well?  Are other competitors taking away their business?  Given that they are a fairly new business, they may also have just not yet hit their stride.

So in summary, sometimes it is a good idea to sell a stock.  Everything that you pick will not be a winner, and with individual stocks they sometimes never really recover.  The good thing is that the winner you do have can make up for a lot of bad selections.  It is also not a bad plan to own some mutual funds, especially in your retirement accounts, to ensure that you’ll at least make market returns with a portion of your money.

Hey, I sure don’t know it all.  Help make this site better by leaving a comment!

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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