More of a question directed towards those with a long term investment horizon. Daily traders obviously sell constantly for obvious reasons. But when you are investing long term, when and why do you sell your position? Especially if you are a buy & hold investor, do you have some sort of criteria that has to be met before you consider selling? I'll let you guys throw a few answers around and write my own selling strategy in a few days when I have a bit more time in my hands.
Generally when the fundamentals dictate it. When an investment is no longer a bargain, no longer growing so rapidly, or when there is some sort of material change that makes it no longer attractive to me. I will also say that selling does not necessarily mean selling out entirely. It may mean selling a minority of my shares of an investment, or half, or a majority, or whatever. I will often sell at least some of my shares of an investment when there is a single day double digit "pop" upward in price. And on the occasion there is a huge pop in the mid or upper double digit range or even a triple digit pop upward, I will usually sell half or more - perhaps all if it is a more speculative investment. Conversely, on investments I already own or am considering, a single day double digit drop downward is often an indicator to buy or buy more of that investment IF the drop is due to a market overreaction to news such as earnings that may not be that bad, or actually not even be bad at all that the market simply didn't "like" for whatever reason. As long as the fundamentals are still there, it's on. I've recently bought small amounts of a couple of promising biotechs that sold off 70+% in a single day due to issues with a single drug - those companies usually make big gains in the days and weeks after. I also will put companies I don't own on my watch list when they have similar big pops upward - I'll watch them daily after the big pop - most of the time they will come back down to earth at least somewhat in the days and weeks that follow - I'll buy in incrementally when I see them have days they sell off double digits. They usually eventually roar upward again - often more than before. When they are temporarily extremely overpriced, they can also possibly be carefully bet against via perhaps a short term put or maybe even a small, carefully executed short stock positon often exited the same day it is executed. I will also clarify that selling out of a position does NOT necessarily mean going to a short position - particularly with higher beta stocks and industries such as many tech, biotech, oil and gas EP names, etc. Having said that, I do often use put options on such high beta investments - sometimes as insurance against a long stock position I have, or sometimes just as a bet against such a stock after I might sell out or even with no long stock position at all. To a lesser extent, I will sell off or completely out of some of my more speculative / high beta investments when I believe the market is pretty fairly valued overall, or when volatility really gets heated up like what we've seen in Oct of last year, and also in the spring of 2010 and summer of 2011. I will usually buy more puts overall during these times. Of course these are also times when some investments I'd previously been looking at suddenly become bargains. One can certainly be buying, selling, and shorting different securities at the same time, even during the same day. Overall, I am certainly more cautious in my investing now than I was 8-10 years ago. The days of being 100% or more entirely long on small and midcap stocks are a thing of the past for me...
There are a few reasons to sell from the buy and hold portfolio. The number one reason to sell is for re-balancing purposes if you have a position that has been running up for a while, you may want to sell off some of it and add to another position or start a new one to keep a balanced diversification strategy. Also, over time there are different reasons a certain company may become less desirable, and that depends on your investment strategy. For me, I want good dividend growth companies, so if I see one in my portfolio that either stops growing the dividend or even cuts it that is a big red flag that will require a good amount of research to find the fundamental reason behind it. If it is a temporary situation that is a justifiable business decision, then I will ride it out; but if a dividend cut correlates with other negative fundamentals, it may be time to liquidate this position.
What JR and norms options say. Additionally I'll sell out as sectors stall and decline, as exemplified by coal and copper a while ago, or particular holdings rise and then and trade in a narrow range without any signs of potential dividends increase, as was the case with Pfizer a few years ago. I'm more forgiving of a range bound stock, e.g. Verizon, when the dividend yield is decent and the cash flow is significant.
One off the beaten path - selling to get my profits if I expect to move to a differemt state with higher taxes (currently living in Florida and possibly moving to California for my son's college)
Ok so time to throw in my own 2 cents. Which is basically what norms options said. I keep up to date on what is going on with the companies and since my main goal is dividend income & dividend growth, I do consider selling if I see that the company is in danger of cutting their dividend over a longer period of time. This is not purely because of the dividend itself: if a dividend cut (or the possibility of one) is coming then it means that something is wrong with the fundamentals of the company... most likely the management is seeing long term difficulties with their EPS and knows it cannot sustain the current dividend with less earnings. And a decreasing EPS is like poison for a company, especially if they don't have much cash to use for investing in growth. So yeah, bad fundamentals can cause me to sell. Other reason that I sell is simply to move my cash into a company that I see as a better investment. Unfortunately I do not have unlimited funds so if I find something that I really like then I might sell something else to fund the new purchase... usually in the same sector. For example recently I sold 50% of my stake in one telecom company and used that money to buy another telecom company which I thought had better fundamentals and more long term growth possibilities. Other than this I don't really sell for rebalancing purposes though, if one company/sector looks to be overweight then I simply direct my next purchases into other companies/sectors to keep the balance. Also a very good point by JR, selling doesn't always mean selling the full position.
Norms options made a very good point about rebalancing - I generally limit the amount of money I have invested in any one company to 5%, and many positions are even smaller. Some of my more speculative investing / trading is done with less than 1% in any such position.
Here's one of those two biotechs I mentioned buying recently when they fell ~ 70%.... up nearly 500% today - I sold 90% of it!... http://www.marketwatch.com/investing/stock/aqxp
Congratulations JR! A trade that certainly worked really well, probably better than even you expected!
It depends on your goal - when you want to pull out at whatever price surplus the stock is at. Usually, it is when a profit is going to be made, so obviously, you take out most of a long term when a profit is made.
