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Selling stocks is not easy. In fact it's quite difficult if you ask me. While most of the investing world focuses on finding the right stock and buying at the right price, very few articles or strategies discuss selling stocks. Probably because most people, including me, have a very hard time with it. Greed, pride and hope often prove to be difficult barriers to selling stocks when we should.
Talking points
- Why selling matters.
- When and why you should sell a stock.
- How to sell stocks.
Why selling matters
Warren Buffett once said, AAAWhen we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.AAA This is a great quote and underlines an excellent principle of value investing. That is to keep trading down as little as possible. But itAAAs really not all that practical or profitable to buy and hold forever. DonAAAt get me wrong, holding wonderful companies with great management is our whole goal, but itAAAs very unlikely that one stock will be undervalued and earning great returns forever. Ultimately youAAAll need to rely on value conscious decisions as to when you should sell your stocks.
After all, selling is crucial to investing success. Think of the old adage, AAAYou make your profit when you buy, not when you sell.AAA This is true to a point, but ultimate return is dependent on when you buyAA andAA when you sell. Ideally you'll sell stocks in order to maximize gain and limit losses. However, this is often very difficult to accomplish. Most of the time we end up selling our winners too soon and our losers much too late. While locking in gains is important, limiting losses can be an even greater reason to form a systematic selling strategy. Just take a look at the graph below to see how much gain is needed to offset relative losses.
https://www.fortpointcap.com/#Why
As my previous three articles touched on, our own emotions and psychology often prevent us from selling when we should. Fear, pride, hope (desperation) and other emotions play large roles in investor selling patterns. So knowing when and why to sell, as well as having a systematic strategy, is vital.
When and why you should sell a stock
First, a few notes about selling stocks in general. Time and time again studies have proven the more transactions you make, the more your portfolio trends toward average. But why is that? Simple, the more decisions you make, the more chances you have of making mistakes. As with buying stocks, donAAAt attempt to time the market or base decisions off technical indicators. The only people who consistently buy at the bottom and sell at the top are liars. So donAAAt make an already difficult process even
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
