Keep calm, use numbers wisely.
Even though there exists no stock market equivalent of Craigslist, that doesn’t stop a good many investors from fantasizing about selling off shares to some shopaholic for more than they’re worth. Of course, you’ll want to part with an investment before bad scenarios hit — and ideally when it hits a ripe, delicious peak. Experts agree on this much: Crude market timing simply doesn’t work. Coin tosses and Ouija boards are out, too. In the end, selling amounts to an intelligent use of numbers, cool-headed rationality and avoiding knee-jerk fear. Here are eight times when selling a stock is a good idea.
When your number’s up.
Oliver Lee, a financial planner and investment advisor at The Strategic Planning Group in Lake Orion, Michigan, describes the strategy this way: “If a stock hits your high number, you sell. However, if the stock never quite hits your high number and falls to your low number, you should more than likely sell. For example, I have a client with a significant amount of stock in AT&T (ticker: T); if the price rises to $37 per share or falls to $30 at close of trading day, this would trigger a sale.”
When it falls into the GAAP.
GAAP stands for generally accepted accounting principles, the standard to which all companies must comply. Applied to earnings per share, you can look for a multiple going forward that hits 16.5, says Brent M. Wilsey, who owns and operates San Diego-based Wilsey Asset Management. “We use a multiple of 16.5 because that is the 40-year average for equities. Even dating back to the late 1800s, the forward EPS multiple was approximately 16. By using 16.5, we can ensure we are not overpaying for the earnings of a company.”
When it outflanks the taxman.
A prudent stock sale creates more value than measured in mere share price. “Currently if someone is in the 15 percent tax bracket, then they may not have any long-term capital gains,” Lee says. And for accounts not qualified for tax-exempt or tax-deferred status, “selling small amounts of stocks could save thousands of dollars in extra taxes.” Also evaluate a sale when a lousy stock is down “and use the loss as a tax write-off against other stocks sold at a profit.”
The middle of the day.
This applies mainly to day traders, who often compress their buying and selling activity to days or even hours. The earliest part of the trading day often proves chaotic, as the markets jump on breaking news from the previous evening or early morning. While that kind of froth can prove advantageous for experienced day traders, the pre-noon hours are also highly volatile. By midday, things have calmed down. The market has had time to digest the headlines, making it easier to judge a potential sale.
When everyone else is buying.
Market watchers all too often follow a herd mentality — and act in reverse of the proven models created by pioneering investors, such as Benjamin Graham. “If you’ve held a certain stock for several years, you should sell this stock when everyone else is buying it,” Lee says. “In many occasions, when a stock is at the top and everyone is talking about it, it’s time to get out.” He adds: “This happened with Yahoo (YHOO) in 1999. At one point it was trading at 15,000 times earnings and everyone wanted in. However this was a good time to get out.”
Deteriorating fundamentals.
This means taking a look at the financial basics that make a stock worth buying in the first place, “particularly estimates of earnings and five-year growth rates,” says Bob Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania. “If earnings estimates or long-term growth rates begin to deteriorate, it is time to sell. Too often, investors hold on to stocks based on hope. The hope should be based upon fundamentals.”
High debt-to-equity ratio.
A valuable stockpile of stock certainly creates confidence — but at what cost? Here’s how to make a smart judgment: If the company has a debt-equity ratio of more than 150 percent. “Debt-to-equity is a great measure to show whether a company has become over leveraged,” Wilsey says. “As an example, we always tell people that it’s great if you own a $1 million dollar home. But if you owe $1.5 million on that home, then it’s not so great.”
Not at all.
Value investors such as billionaire Warren Buffett believe the longer they hold a stock, the better its prospects. At the tender of age of 86, Buffett is still snapping up companies and shares — and with no signs of settling for one last score for the bucket list. As Buffett famously stated in his 1988 letter to shareholders of Berkshire Hathaway (BRK.A, BRK.B), “Our favorite holding period is forever.”
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8 Times When You Should Sell a Stock originally appeared on usnews.com
