Five Ways to Sell Stock and Feel Good About It
As the rally stalls, have your plan ready.
Sounds pretty easy, but as the man says, "not so much." In the past few months many, if not all, of you have bought low. Not so hard to do after a monumental crash. Now comes the tougher part of the equation: selling high.
As a licensed securities broker for the past 26 years, there's one thing I've come to know as a certainty, and that is this: Very few clients know when or how to sell a security. In working as a branch manager and securities company owner for 17 of those years, I can also say with confidence that very few brokers are any better at it. There are many reasons you might want to buy a stock: personal research, a nice article in Minyanville, a hot tip from your barber, and so forth. And it's so easy, so exciting to buy. Each new idea is a "can't miss" investment. But why do we sell a stock? And more importantly, when should we sell it? Let's talk about that a bit.
I've noticed over the years that there's a very identifiable process that takes place when a winning stock position turns back and moves against the average investor. It normally is a four-phase process. Here's how it goes.
Phase One: "Should I buy the dip?"
The stock you bought has now turned into a winner. This stock -- the one that was going to buy you a new car -- tops out and begins to go against you. It falls quickly, moving below your purchase price, and that car you were going to buy with the profit has disappeared. No problem, this is just a correction. It will go up again. The stock continues to fall and in a very short time, you're down 10%. This is where a bad thing can turn very bad. You begin to think to yourself "maybe I should double up." Bad idea. Believe me when I tell you the odds are very much against you on this one.
Phase Two: "It will come back."
Let's say you resisted the temptation to add to your loser. Well done. But the stock is now down 30% from where you purchased it. At this point, you're really sorry you didn't put in that 10% stop loss. But a 30% correction isn't fatal. The stock has recovered from this type of pullback before, and you're certain it will again. It wasn't long ago you were picking a color for that car.
Phase Three: "I can't afford to take this loss."
Your investment has now been cut in half. This is where there is great pain and anger. Pain for you, and anger from those who must listen to you explain over and over again how good the fundamentals of the company are, that there is a short raid going on, etc. The truth of phase three is that this is just too big a loss for you to handle emotionally and/or for you to explain to your significant other. So you choose not to take it. You just simply cannot have been this wrong.
Phase Four: "Capitulation or adoption."
This is the phase when there are two very distinct choices available to you. The stock is now down 75-90%. The first choice is capitulation. The pain is simply too great and you're not sleeping well. And besides, you just heard about a great new idea where you can get your money back. So you throw in the towel and vow to never buy that stock, or its products, ever again.
The other road you might choose is adoption. You simply tell your broker to send you the stock certificate and you stop thinking about its value. This road offers two decent outcomes actually. First, the stock might make a miracle comeback years down the road and you'll be able to say you were smart enough to buy early. Or, your grandchildren can take the certificate to school for "show and tell" to illustrate to their friends what a bankrupt company leaves behind. This can provide a decent learning moment for them, but probably not for you, I'm afraid. That ship sailed when you had the certificate sent to you. I speak from experience, as I have two stock certs that my father gave me. They're from the '60s. He bought them, they went down, he put them in his drawer and forgot them. When he gave them to me in the late '80s, he still thought they might be okay. Not so much.
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