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Stock Selling Strategies: Introduction
When to Get Out of the Market
by Marco den Ouden

There is a multiplicity of information available on buying stocks. Books, newsletters, brokers, and sometimes even the cabbie or your dentist will have opinions on how to pick stocks, or even on specific stocks to buy.

But where can you find information on when you should sell a stock? Precious little is written about that! And even a writer such as William O'Neil, founder of Investor's Business Daily, who does offer suggestions on selling, focuses on the stock selection end of things.

In his book, How to Make Money in Stocks, O'Neil offers a number of pointers on selling and even goes so far as to list 36 "prime selling pointers". The number one pointer? "Buying right solves half of your selling problem".

O'Neil's specialty is growth stocks. But that pointer is also a prime consideration for another school of investing - value investing. This investment philosophy is often associated with the phrase "buy-and-hold". The idea is to select solid but undervalued stocks in the first place and hold them for ever, barring unforeseen circumstances. Their selling strategy is, basically - don't!

  One of the prime exemplars of this school is Warren Buffett who topped Forbes list of the richest men in America in 1993. He was the only one who made his fortune through shrewd investment. Buffett doesn't have a ticker display in his office. Doesn't follow the stock market. Gives little thought to the state of the economy. His philosophy is to buy stocks as if you were buying the whole business. It's the continuing and growing profitability of the company and the soundness of its management that is key.

Buffett goes so far as to say that you could shut down the stock market for several years and he wouldn't care. It's the value of the business that counts, not the price that the stock market puts on it.

But others disagree. And even Buffett will sell some stocks if he perceives that they are greatly over-valued by the market or if he wants to free up cash to pursue an interesting opportunity.

Suggestions on selling include cutting losses short, selling half of your interest in a stock when it doubles, selling if a company's fundamentals deteriorate, using technical indicators such as moving averages or Bollinger bands to determine exit points and basing participation in the market on the action of broad indicators (otherwise known as market timing).

Eleswhere I've taken a tentative look at the idea of buying and selling the same security over a period of time when it advances 10% from a recent bottom or declines 10% from a recent top. With volatile stocks, such a system nets huge rewards, even if the stock is in a long run down trend.

Whatever method we choose, it is important to apply it consistently. As FundAdvice.com points out in an article called Which is Better, Buy-and-Hold or Market Timing?, some people who believe they are buy-and-hold investors are actually a perverse kind of market timer that the writer calls the ICSIA or "I can't stand it anymore" investor.

This, the writer points out (and probably accurately) is the worst and the most widely used investment system in the world. Such investors base their decisions on emotional reactions to the market. So when they see certain stocks going up and up and up, not jumping in because they fear the stock has already gone too high, they finally succumb when the stock is near its peak because they just "can't stand it anymore".

Of course, the stock then goes down the toilet and they don't sell, again fearing that this is a temporary correction and that the stock will rebound. Finally the stock falls so low that they (yes, you guessed it) just "can't stand it anymore". They sell and take their lumps.

And then of course, the stock finally rebounds, maybe even soaring to new heights. Instead of following the maxim of "buy low, sell high," they do the complete opposite. They buy high, and then sell low.

In a series of articles over the next two months, I will look at a variety of selling strategies. I'll explain what the strategy is, its strong points, and its drawbacks. The situations in which it proves useful, and the situations in which it does not work very well.

The strategy an individual investor uses should be tailored to the individual and her investment style. I'm not going to argue that one system is right and another wrong. My goal is to help you become familiar with these strategies so you can choose the one best suited to you. And it may be more than one system - an amalgam of several strategies. Only you can decide that.

But it is important to have a selling plan. Which plan doesn't matter so much. But have a plan and stick to it.

Net Links of Interest

Which is Better, Buy-and-Hold or Market Timing? - interesting article from FundAdvice.com


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