The come-ons to buy stocks are plentiful, from Wall Street analysts to financial magazines to spam e-mails. Far less frequent is the opposite...
CHICAGO — The come-ons to buy stocks are plentiful, from Wall Street analysts to financial magazines to spam e-mails.
Far less frequent is the opposite message: Sell these stocks now!
Selling is when investors make actual money, of course, but that doesn’t make it easy.
“I think it’s the hardest part of the business,” said Carl Marker, portfolio manager of the IMS Capital Value Fund. “I think it’s where most of the mistakes are made.”
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While buying may get the attention, experts say too many investors overlook the importance of building and monitoring a complete portfolio — and knowing when and what to sell.
“Selling and construction are just as important as buying, but buying gets 90 percent of the attention,” said David King, portfolio manager of the Putnam New Value Fund.
A key, experts said, is for investors not to spend time caught up in the excitement of finding a new buy at the expense of monitoring what they already have.
“Too many people in my opinion look at what they’re going to invest new money into rather than looking at their whole portfolio,” said Kenneth Janke, chairman of the National Association of Investors Corp., which works to educate investors and investment clubs.
Although buy-and-hold is the oft-repeated mantra, some experts stress a buy-and-don’t-forget approach, reminding investors that selling is sometimes necessary.
Experts agree the first step in sell decisions is to take the same approach as in buy decisions.
Rob Roquitte, portfolio manager of the Harris Insight Small Cap Value Fund, ranks stocks based on cash flow, earnings and other valuation measures; strong and improving fundamentals; and investor interest.
He buys when readings are favorable and sells when they’re deteriorating.
“We tend to take as much of the emotion and subjectivity out of the decision-making as possible,” he said.
Experts stress the importance of selling based on the numbers, not emotions.
When it comes to cashing in profits, many investors set price targets when they buy and sell some or all of their position when the stock reaches that level.
But some experts said that can be taken too far, because shares may well continue to go up.
Research suggests individual investors tend to sell stocks that outperform those they buy.
Keep some winners
Janke said he believes in hedging some profits but warns that if you sell all the winners, what you have left are the dogs.
“One of the big mistakes in selling stocks is … because they’ve got a profit,” he said.
Experts stress that investors have to watch fundamentals, particularly in the context of the overall market.
“I do think it’s a tough game for an individual, simply because if you set a price target for yourself, what you also need to be paying attention to is the rest of the market and what’s happening in that sector,” Roquitte said.
“Ultimately, you’ve got to pay attention to valuations.”
On the flip side, experts say, don’t just sell your winners.
Research shows investors are particularly reluctant to sell losers, hanging on in hopes of a rebound that may never occur.
“We become emotional about the stocks we buy,” said Janke. “You fall in love with it, you feel you made the right decision. You don’t want to admit you made a mistake to begin with. … That’s sad. We all make mistakes.
“It’s the emotional part is what it really amounts to. None of us like to say that we’re wrong.”
Although some investors use stop-loss orders to sell at a certain price — say, a drop of 10 or 20 percent — to cut their losses, many experts advise against it.
“If you try to use stop losses, you usually end up selling a lot of things,” Marker said. “It sounds good on paper, but in practice … it doesn’t work very well.”
Janke urges a longer-term view. Stock prices have normal fluctuations, he said, and selling a $30 stock just because it falls to $27 can be shortsighted.
“That shouldn’t be a big deal. It might be more of a buying opportunity than a selling opportunity,” he said.
Investors who look for bargains need to think about selling when the stock no longer fits that category, experts said.
“The most obvious reason as a value investor to sell a stock is it becomes expensive,” King said.
If you buy a stock at eight times earnings and it goes to 30 times earnings, he said, “That’s always the fun and easy one.”
A key reason many professionals say they sell is because they are indeed monitoring what to buy and see better opportunities.
Part of the challenge is “weeding out things that may not be mistakes” in favor of things that look more appealing, King said.
“We don’t sell to sell. We sell because we see something that’s more attractive than what we own,” he said.
Potential negative factors also can play a role in sell decisions, including management turnover, restatements, litigation, a change in the legislative or regulatory outlook, or a rash of insider sales.
“The truth is, usually when that comes out, the market reacts very quickly, and it’s hard to get in front of that,” Roquitte said.
The issue, then, becomes to what degree it will continue to affect the company’s stock price.
As important as knowing what and when to sell, of course, is knowing when and what not to sell.
Don’t just tinker
Aside from not selling stocks with good fundamentals, experts advise not to sell simply for the sake of tinkering with the portfolio. Boredom, they say, is no excuse.
“You shouldn’t sell just to do something,” Janke said. If you bought a good, growing company at a decent price, he said, “the best time to sell is never.”
And experts urge investors to relax, giving up the futile quest of trying to time the market perfectly.
“None of us are going to buy stocks at the absolute low and sell at the absolute high,” Janke said.