Investing icon Walter Schloss warned not to be too quick to sell a stock. He outlined 16 factors for making money in the stock market, mostly encouraging the reader to get to know the company, make a decision based on that knowledge and stick to that decision. An old Wall Street saying claims it is easier to scare someone into selling a stock than it is to educate them into buying. If you know the underlying facts about your investments, you will not be so easily scared out of a position that might make you money.
The decision to sell or hold a stock should be based on value and facts, not rumor or emotion. Negative change in price-earnings ratios, analyst sell recommendations and changes in the economy are all good reasons to consider selling. If you choose to hold a stock that does not pay dividends, and the price goes down, you may be stuck holding a non-performing asset for months if not years until that stock captures the buying interest of other investors. If you are not receiving dividend income, it is better to move out of a position that appears to be faltering than it is to hold on in hope that it will recover. Online brokerage commissions make it inexpensive to move in and out of stock positions if your research indicates a real threat from company fundamentals, market sentiment or economic conditions.
You had a reason for buying the stock, which should have been based on the company's fundamentals such as good management, popular products, growing earnings and increasing market share. If management leaves, the company ceases to introduce new and innovative products and earnings decline, it is time to re-evaluate the company. New management may be beneficial and the company may be working on an exciting new product line, but if you find this is not the case, it may be time to sell.
Scale In, Scale Out
Professional portfolio managers rarely dump all their money into a position or sell out of a position in one trade. They normally scale in by buying 25 percent to 50 percent of their intended position at a time, depending on current market volatility and how certain they are of their decision to buy. They also scale out for the same reasons. Scaling keeps you from buying your entire position at a temporary high or liquidating at a temporary low. It also gives you time to evaluate the fundamentals of the company rather than selling out of panic. If your stock has reached the price you had expected, take out the majority of your principal and let the profits ride. If you feel confident that the company remains a strong investment, buy back in on any dips.
Watch the Technicals
Walter Schloss was a fundamental investor, but many professional investors rely solely on technicals -- analysis of stock price charts -- because they feel that technicals show the mood of the market with respect to a specific stock. Sometimes the price charts forecast an important change in the fundamentals or indicate money moving from one industry to another because of the economy and market cyclicals. Moving out of automobile stocks into home improvement stocks when the economy slows is an example of trading based on market and economic cycles. In a slow economy, people do home repairs themselves and don't buy new cars. Check price charts to determine if your stock is trading in line with other stocks in its industry and whether it has failed to break through a historical high price resistance level or has failed to maintain its upward price trend. These are signals to at least begin to scale out of your position.
Hedge Your Position
When in doubt, buy a put option on your stock. A put gives you the right to sell the stock at the price listed in the put contract. If your stock continues to trade up, don't exercise the put. If your stock trades down, and you think it is only a temporary move, sell the put. It will have increased in price and will provide you with some profits, which you may use to buy more of your original stock position at the new lower price. Exercise the put if the stock trades down and you think this is a long-term move. Exercising a put allows you to get out of the position without losing money.
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