The Virtues of Panic Selling

 | Dec 07, 2012 | 1:25 PM EST
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We are often told that it is a mistake to "panic sell" a position that is acting poorly. I'm not so sure that is true, but it depends on how you define the word "panic." If you panic for the right reasons at the right time, it can be an effective approach.

The folks who use the term "panic sell" are usually thinking in terms of valuation, and they conclude that anyone who doesn't recognize the value they see must be acting emotionally and making irrational decisions. Sometimes that is the case, but often there are good arguments for what others might say is a panic sell.

Apple (AAPL) is the stock that is the focus of much of this discussion now. It is obviously down a lot and struggling, therefore, those who are bullish about its prospects like to think that the sellers are panicking and not acting rationally.

I suspect many of the people who are calling this action panic selling also believe that it was panic selling when AAPL broke its 50-day simple moving average on Oct. 8 and traded to $640. In fact, I am certain you will find hundreds of comments about the stock being a "buying opportunity" due to the "panic selling" that was taking place.

There are plenty of folks who think AAPL is a compelling buy now based on fundamentals, but from a technical standpoint, the chart is in a precarious position and selling would not be irrational.

My point is that one person's "panic selling" may be another person's "portfolio management." Just because you are looking to sell a stock that is already down substantially, it doesn't mean that you are necessarily acting without justification. If you are going to sell a position, just make sure that you are doing it for a clear reason. On the other hand, if you are going to hold on to something, don't do it just because you don't want to be accused of panic selling.

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