How do you know when to sell a stock? Especially a profitable one?
I am up 110% on AMD so far and while it's great, I feel like I should take my winnings and run (reinvest in something else). I just cant seem to pull the trigger though. I do still believe in AMD though.
How do you guys know when to get out?
Videos
I recently read Joel Greenblatt's "The little book that beats the market" where the author draws on Graham's value investing principles to purchase stocks of good companies that are undervalued. He developed a step-by-step process on how to purchase shares of 20-30 undervalued companies for a year and selling winners after holding them a few days more than one year and losers after holding them a few days less than one year (keeping in mind the capital gain cuts). It got me thinking about my portfolio and my question resulting from that was, if a stock is doing well and the company prospects are solid, should you still sell the stock? More generally, if the goal is long term investing (like Apple for example with a strong balance sheet and a solid market position and brand value), how long does it make sense to hold a stock before selling it?
If the stock offers options, there are some strategies that can be used to lock in the much of the gain. Other than that, you don't have much choice.
In lieu of that, you could sell 20% of the appreciated position, pulling out 25% of the invested capital but this would only book 5% of the gain. It's not a good solution for anything other than lowering cost basis.
If you buy at X and sell at Y which is 25% higher, you have two choices:
Wait until your stock drops back to X
Find another stock that offers the potential of rising in price. This is what traders do. It's no different than a long term investor who decides that after a large run up in price, the stock is overvalued and redeploys the money (reallocation). Just the time frame is different.
You don't have to sell just because the price has gone up 25%.
You sell...
- if you need the money...
- because you think that the company share price will not be growing any more or even it will be going down...
- because you have found another investment that has more potential...
- because you want to rebalance your investments...
- because you have to pay a tax bill...
In some of those situations you know exactly where you will be reinvesting the proceeds. In other cases you keep the funds in cash until you pay the bill, or find the next investment.
You sell the stocks, cashing out your original X plus a 25% profit. Yay! You made money. But haven't you also put yourself out of the trading business by not having stocks anymore?
Most people are invested in multiple types of investments, and even if they only have one type of investment they generally are invested in multiple companies. This is diversification. They don't want all their money invested in one company in case they make a bad pick. That means that when they sell that investment they plan on moving the funds into another company, or another investment type.
Regarding that investment that went up 25%. You don't even have to sell all your shares. You can decide to only sell some of them.