When we talk about stocks, we usually focus on selecting and buying them. The hunt for new ideas is one of the most enjoyable aspects of investing, and investors often become emotionally attached to stocks that they have researched and followed for a while.
But the decision of when to sell has a far greater impact on our investing. Selling always causes mixed or negative emotions. In most cases, it is deemed to be recognition of a mistake or failure, and even when we are taking profits, we wonder if we are selling at the wrong time. Investors would much rather focus on buying than selling.
The most powerful tool that a trader or investor possesses is the ability to exit a position in a matter of seconds. It is extremely easy, but most investors fail to use this tool effectively. Even when we know that we should be selling, we have to deal with emotions that drive us to hold on. The buy-and-hold mindset frowns on any type of selling, and no one likes to admit that the stock they thought was the next Apple (AAPL) is a dud.
The first step in being a better seller is to cultivate a selling mindset and to view selling as a powerful, strategic tool that gives you great flexibility. The main reason selling isn't used more aggressively is because people are afraid they will sell at the exact wrong time and never be able to own the stock again. That is nonsense, but it is necessary to attack that feeling head-on and reject it.
I like to think of selling as nothing more than an insurance policy. There is nothing to stop me from rebuying at any time, and if I have to pay a higher price, then that is just the cost of avoiding some level of risk. Selling is not a decision that locks you into anything. It is just a strategy that allows you to control your level of risk.
Once you overcome the emotional baggage associated with selling, the hard part is having a plan and sticking with it. Most traders and investors are not at all clear about their selling plans. They just want to buy a great stock and wait for the profits to roll in. They don't want to contemplate what to do if the trade doesn't work or when it will be a good time to take profits.
Have a plan. When you don't have a plan that forces you to act, then you will constantly be looking for reasons not to sell. Most commonly, an investor will focus on the great fundamentals and start looking for all the reasons that the market is mispricing the name.
The more mechanical and automatic you make your selling, the better off you will be. I will discuss in a future article how to set stops and how to use a chart as a roadmap to trade management, but the point is to have a very clear point where you are forced to act.
I want to stress how important it is to make the sell decision mechanical. The biggest losses almost always come when you continue to bury yourself in a stock and find a slew of justifications for why you should not act.
It is inevitable that many sell decisions will be poorly timed and far from optimal, but the important thing is that you reduce risk when the conditions become negative. Once you sell, you can reevaluate the situation and rebuy the stock if you want, but you have prevented inertia from setting in, and that is key.
Don't make a buy unless you have a set stop-loss point in mind, and then honor it. I often enter a trade with the plan to build a position via multiple buys at a volatility level, but I still want to have a clear point where I am going to make some sales.
Selling is your best friend. Embrace it and use it wisely.