When is the Right Time to Sell a Stock?

In another post, I outlined some ideas on when to sell a stock based on looking at percentages.  In this post, I want to give some other ideas about when it might be a good time to get rid of a losing stock, or one that appears headed for a loss, or one that seems to be going nowhere any time soon.

If you’ve read any of my other posts, you’ll know that I became a convert to the idea of buy-and-hold investing about a couple of years ago after years of pitiful losses, and how since then my portfolio has dramatically improved.

However, sometimes a person swings the pendulum so far that they miss the middle ground.  In my case, I got so afraid of selling anything after my “conversion” that I decided to hold on to a couple of losers to the point where I was sitting at a significant loss.  (I still have a couple of poor returns, but I believe in the long-term outlook of these companies and so I hold.)

I realized then that I needed to have a middle-ground strategy.  Specifically, I realized that I needed to evaluate stocks that weren’t doing well in order to find out why, and to then determine if their long-term outlook was still good enough for me to hold on or if my money would be better invested in something else.

Don’t ignore bad news

With one of my losers, a 3D printing stock that I eventually took over a 30% loss on, I ignored some red flags that started to appear in early 2014 after the stock had nearly doubled in a few short months.  It had nearly doubled for me and it’s almost as though I didn’t want to believe that the ride would end, so I ignored news about questionable company management, too many acquisitions, lack of focus, and so forth.  I also ignored news that was negatively impacting the 3D printing industry in general.

And so that wonderful profit started to plummet into a sizable loss before I learned about the idea in the post that I referenced above about cutting my losses short at 20%.

Just take the loss and move on

Even though I was tempted to hold on for the long term, I just really didn’t feel good about how long it might take for 3D printing to make a turn-around.  So I sold between $30 and $32 and the stock has since plunged to around $22.

If I had been too afraid to sell, like I’ve been in the past, and make a decisive buy decision about another stock I had been tracking, I would be wallowing in a 50%-plus loss in my 3D printing stock.

Learn from your mistakes

Not long after I took my loss in 3D printing, I started to look closely at my Whole Foods Market (WFM) stock that had dropped over 40% in the year after I bought but which made a sizable comeback from November 2014 to February 2015.  By then, I was at only about a 10% loss.  But then it started a decline from it’s peak of around $57, and I started to investigate why.

It turns out that that there were several reports of competitors offering better prices on organic foods.  Even though those competitors do not put their products through the very stringent acceptance process that Whole Foods does, that didn’t seem to matter to consumers as they started to buy less expensive supposedly-organic offerings from the likes of Kroeger’s and Costco.

That was enough evidence for me that perhaps there was going to be a pretty rough road for Whole Foods over the next few years due to this increasing and powerful competition in the organic food space.  I got out at $52.50, the stock’s price continued to drift downward, and then today (as of this writing), it plummeted nearly 10% down to $43 on news that confirmed my suspicions.

Now, I’m still upset that I lost nearly 20% on this stock, but I would have been more upset if I still owned it and was sitting at over a 30% loss and no real sense that it was going to recover any time soon.  However, I’m proud that I learned from my 3D printing experience and followed my recently-devised rule to sell after a 10% pullback from a high if the company’s news wasn’t looking good.  In this case, I sold at about 8% less than the high, which took away some of the emotional sting of that 20% loss.

Fortunately, the stock I bought in its place, XPO Logistics, was a very good move and has already made a major acquisition that will triple its revenue within the next year.  There’s no way that Whole Foods will triple its revenue for a very long time.  Therefore, this move was good in the sense that I should recover my nearly 20% loss far sooner than if I held onto my WFM stock, and it should then thrust into positive territory if this new company keeps doing what it has been doing these past four years.

The Final Word

If you’ve read most of my other posts that continually preach buying and holding, it might seem hypocritical for me to even suggest the idea of selling a stock.  But even though I’m still an avid fan of buy-and-hold, I also realize that I need to not ignore warning signs about an impending downfall.  I’ve heard that even Warren Buffett, the ultimate champion of buy-and-hold, sells a stock from time to time if the key reason(s) he bought the company starts to fall apart!  If I cut my losses short, ideally less than 20% overall or after a 10% pullback following a huge run-up, then put that money into my winners, hopefully my impressive returns thus far will only get better.

One more thing:  even though it’s hard for me to sell anything because I don’t want the price to go up, if I perceive that a stock will fall farther – and I was correct with the two that I’ve mentioned – I can still always buy again, but at a much lower price if I perceive that a major turnaround is starting to occur.  I never bought any CLNE until I perceived that it’s dog-days were over, and got in just as very tangible good news started to emerge.  I missed out on major losses by not buying when it was first recommended and instead have seen a sizable return thus far.

Of course, I don’t write all this to brag or to give the impression that I think I’m somehow clairvoyant, but rather to warn you to not sit there shell-shocked if one of your stocks starts to slide.  If you don’t detach your emotions and act quickly, your losses could multiply, and I hope that I’ve encouraged you with ideas on how to act in this situation.

One last thing:  be sure to click the Follow button near the top of this page.  Also, if you’re a brand-new stock investor – or still thinking about it – then I highly recommend starting with my 5-part Stock Starter Series.  To new beginnings!

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