Wednesday, November 29, 2006

Successful Investing 101 – Know When to Sell

Selling an investment is a hard but important skill to learn. Many investments will have good returns for only a few years, 10 years if it is outstanding. Recall Enron and Worldcom. Yes, they were scandals but the same advice applies to good companies. Also off note are Dell, Microsoft and General Electric, which are still less than 30% of their peak which happened in 1999 to 2000.

Here are some guidelines I use on when to sell stock investments:

After a significant short term jump in the price. When the stock price jumps 20%+ in one day, it often is not sustainable. If a stock jumps 50%+ in a week it is often not sustainable. More often than not, it is better to take the profits at such a point. If you’re wrong, you can always get back into the stock at a later time. If you’re right, you avoided losing a portion of your profits.

When the general market or the sector is weak. "Don’t fight the tape" is a famous stock market adage. If the market or sector is in a downward trend, it’s a good time to sell. If the stock has dropped, try to sell during one of the short term rallies that normally occur during a down trend.

When it is no longer a buy. I have several criteria for determining whether a stock is a buy or not. When a stock no longer meets those criteria, I start looking at opportunities to sell it. If the stock is still rising, I will sell when it appears to have peaked. If it has dropped, I will try to sell into a rally.

When the company's business model is no longer a competitive advantage. Microsoft and Dell established a significant competitive advantage in the 1990’s with their business models. Microsoft owned the software market because of their dominance in operating systems. Dell’s supply chain management and ability to build to order enable it to mass customize more powerful computers at lower prices. However, Google may make Microsoft obsolete and the rapid commoditization of computers my obsolete Dell.

With the rapid global and market changes occurring in retail, Wal-Mart may be another successful company that loses its strategic competitive advantage in the near future.

One risk of using these guidelines is selling a stock too early. However, it is always possible to buy the stock again if the sell decision proves wrong. On the other hand, being an optimist sometimes keeps me from selling a stock that meets the criteria, resulting in a greater loss.

Photo Credit: morgueFile.com, Darren Hester

This is not financial or investing advice. Please consult a professional advisor.

Copyright © 2006 Achievement Catalyst, LLC

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