Determining When to Sell Your Stock, Absent Emotion . . . When Possible
Selling is perhaps one of the most emotional components involved in the art of stock trading. “Giddy” with happiness is perhaps the best emotion you can feel in selling, say like when you’ve sold off a massive stake in a 10-bagger. “Emotionally distraught and downtrodden” would be its opposite number, perhaps experienced after selling a huge stake in a company whose stock price collapsed in a nanosecond to near nothing upon the announced surprise arrest of the entire management team on fraud charges.
The mere thought of selling can often stir one’s emotions even if it marks a grand-slam home run in capital gains. You might find it hard to let go of your position because you’ve likely invested time, as well as money, into it. You’ve gotten to know the company and have probably enjoyed following it on its journey towards success and profitability. It might feel like saying goodbye to an old friend. And, such sentimental emotions aside, when contemplating the right time to sell, greed often raises its ugly head.
Wait a minute, didn’t Gordon Gekko say “greed, for the lack of a better word, is good?”
Right, so let’s try to take emotion out of the equation when figuring out when to sell and when to hold. Consider a measured approach for determining when to sell based on these various parameters:
Disaster
This one’s easy—when disaster strikes sell! This could be anything. Management team goes down in a fiery airplane crash—sell. Tsunami takes out HQ—sell. CEO arrested while attempting to board an international flight with a one-way ticket—sell. Company product recalled for suspected link to flesh-eating disease—sell.
Timing
Sometimes a promising mining claim doesn’t pan out, so the miner moves on to another claim and gets back to panning in search for that elusive ore. Such it is with some companies too. Even if you like the company’s business plan, model, infrastructure, and management team, if the company’s strategy for increasing revenues isn’t making headway in a reasonable amount of time it may be time to get out. In making your investment thesis, incorporate a deadline of sorts that allows the company a realistic and reasonable amount of time to deliver results. If the company just plods along without any real momentum towards delivering results by the deadline, be like a miner and move on to the next claim.
Insider Sales
Insider purchases of company shares with their own cash is always a good thing, but when an insider sells it’s worth taking note. Company management are just like us in that they have bills to pay, kids to feed, want to splurge every now and then, etc. so they do sometimes need or want to free up some cash. Thus, a bit of selling might not be a red flag, but if you see sizable insider selling it’s time to join them by exiting your position.
Valuation
This is a tough one because smaller cap companies often cannot be effectively assessed by traditional valuation metrics. Fast-growing, smaller companies generally look overpriced when based on current and near-term earnings. Any decision to sell will be entirely subjective, so it’s up to you to determine whether the valuation is justified on what you think the company might earn in future years. If the valuation seems bat-guano crazy, figure out why and consider selling if the valuation is based more on guano than a somewhat measurable path for the company to increase profits.
Take Profits
This one’s highly subjective, and, well, can’t help but involve greed. Do you sell when it’s a three-bagger? Five-bagger? 10-Bagger? That’s up to you and if you make a nice profit you can notch another victory in your trading strategy. Just try not to let your emotions intrude should the position continue to rise ever higher. It happens, so take the win and move on happily.
Spidey Senses
And, yes, so much for trying to keep emotion out of this, but if something just doesn’t feel right about the company and your Spidey senses are tingling, consider hitting the sell button. If it’s a one-off sensation, tied perhaps to an unexplained downtick in stock price or a bit of negative news, it can probably be ignored. But if it’s an ongoing sensation that just cannot be nipped, it might be best to pay it heed. And if you’re really conflicted about it, make a moderate defensive move by selling off half or whatever portion of your holdings in the company that will make you feel more comfortable.
Overall Economy
Panic selling due to market index freefalls is akin to joining a herd of cliff-diving lemmings. Market freefalls, you may have noticed, tend to recover—in some cases, quite quickly. Many lemmings, on the other hand, often don’t. If you’re confident in your chosen company’s future prospects and financials, don’t pull a lemming, as it will most likely recover with the overall market.
Also, and to pull a bit of emotional wisdom into this parameter, such market freefalls are often times to “be fearful when others are greedy and to be greedy only when others are fearful.”
That said, if the freefall is definitively being caused by the arrival of the Zombie Apocalypse, sell.
