Learn when to sell stocks
Every strategy for investing or trading in the short-term implies two simple acts: buying and selling.
Obviously, it only makes sense to buy if we can sell, otherwise there would be no market.
The majority of the information about this issue is about when to buy and not so much when to sell.
What is the best moment to sell stocks?
A long-term investor knows when he is buying but does not know when selling – although he should have a plan B just in case – while a short-term trader should know when he is buying and when he is selling; in other words, he should have a trading plan.
Let us see what moments are good to sell stocks:
The price reaches the objective
If we have a trading plan focused in the short-term we should have an objective price for selling the stock.
For instance, if we buy Apple at 80 and expect to sell it at 110, more or less.
That should be our objective.
When we are talking about long-term investing we rarely have an objective price. That is to say, a long-term investor does not buy Apple at 120 with the objective of selling it at 250.
If the investor sell the stock at that price (250) it would normally be due to some issue in the markets, not because he had that objective at the beginning.
Therefore, the difference between investing and short-term trading should be clear in this respect.
A change in the fundamentals of the company
This is something to do more with long-term investing since someone who is doing trades that last weeks and months do not normally look at this as something fundamental, or at least should not do.
When a long-term investor sees significant changes in the results of the company, the likelihood that he sells increases.
However, in my opinion this is a strategy a bit dangerous since it may happen that those changes are not as reliable as they appear to be.
Sometimes it could happen that the company deteriorate or improves and the previous “changes” might be wrong.
In this sense, it is difficult to know when a company is giving good signals or not.
It is not easy to know if we are facing Enron or Worldcom, or on the contrary, we are seeing changes in Apple.
For instance, during the 90s Apple had very bad years with not very good results.
For sure many of the investors could not help themselves and sold their Apple stocks.
We know what happened later.
It will be very difficult to beat the market trying to get out of particular stocks based on fundamental data.
Trying to follow all the companies’ data would consume all our time and more.
We should not either trust blindly others analysis.
At the end, and in the majority of cases, just a few strategies that try to follow tactics of buying and selling stocks constantly based on “fundamental changes” will have some significant success.
Remember that not all of us can be Warren Buffett, and he was not able to make all his profits just based on stocks holding, but also used another tactics to accumulate great returns.
Stock opportunity cost
There could happen that in some cases there is the sensation that we are losing a great opportunity by not having some stocks.
This idea could make us sell our stocks and buy the more popular ones.
This idea could lead to good or bad results.
Imagine that you follow an idea like this during the Nasdaq bubble years.
For example, by 1999, investors like Buffett seemed quite foolish not to participate in the party of tech stocks.
Three years later, the owners of the boring Coca Cola or McDonalds stocks laughed.
It is not impossible but it is not easy to identify the best moments to take advantage of trying to catch the best stocks.
After or before a takeover
It usually happens that in the takeover moments, the prices of the stock rise sharply, sometimes quite “irrationally”.
Sometimes these cases present a good opportunity to sell the stock.
After or before a bankruptcy
This is one of the most difficult cases since in many occasions we do not know if the stock is going to go bankrupt or not for sure.
However, sometimes it occurs that we have to “eat” those kind of bankrupted stocks without the chance to get some tax benefits for having losses since the stocks of a bankruptcy company will probably be in our portfolio.
Sell stocks when we think the market is going to be weak
For instance, if we have the impression that we are in the middle of a bubble and that we have several years of rises and falls, a wise decision would be to diminish the size of our portfolio in regards to the pertinent stocks.
Historic cases like this there are lots, like 1929 in the EEUU or 1989 in Japan, or the already mentioned Nasdaq Bubble.
This is easier said than done and having success, since nobody has the magic wand.
Sell stocks due to personal circumstances
We never know if due to a worsening of our financial conditions we will have to sell our stocks to cover our life costs.
Life is unpredictable and sometimes we have to sell even if we do not want to.
Selling stocks when we suspect our country is going to the communist hell.
Another situation when you should sell your stocks would be when we think our country is transitioning to a sort of communist state like the Soviet Union, Cuba, China or North Korea.
If we are capable of identify a worsening of the political conditions of a country and can sell our stocks we could save not only our saving but also being able to escape the prison a communist state virtually is.
All in all, selling stocks is something as difficult as buying them, if not more.
We will always face uncertainty regarding this matter.
We will always have to do “something”, whether sell or not sell.
Everyone will have to study his or her own personal circumstances and accept that sometimes we win and sometimes we lose.
Actually, one of the best advices regarding this is what Warren Buffett said: not sell stocks ever.
The best thing we can do is to have a diverse portfolio and pray that the 200 years bullish trend in stocks continue in the future.
However, do not forget the political problems since not even the countries of the West are immune to it.