When To Sell Shares ?

It's tricky enough deciding what to buy, but when to sell is even harder.
The ideal time to sell shares is never -- well, only when you're finally retired and need to start cashing them in for income. Of course, that means never making a mistake when you buy, and only even choosing companies that never do anything wrong.
And none of us can achieve that -- not even the investment greats.
So when should we sell a share? I'll be honest up front and tell you it's one of the decisions I find the hardest, so these are just some thoughts on the things to consider.


Have the fundamentals changed?
When we buy shares, we do so based on our analysis of the fundamentals of the company (Well, you do, don't you? If you make your decisions based on the shapes of wiggly lines, then I have nothing for you here).
Using whatever valuation method we prefer, we decide that a particular share is undervalued compared to its future potential -- whether than potential lies in superior dividends or share price growth. And as part of that, we'll examine the company's operations, its past record, its management quality, and possibly a whole host of other factors.

And one key reason to consider selling is a change in those fundamentals.
Does it fail to meet profit forecasts? Is there some setback in some key technology? Is it starting to take a hammering from new competitors? Does that super CEO you like so much decide to retire?


If things like this happen, pretend you don't own the shares and do your fundamental analysis again. And if it just isn't one you'd consider buying now, sell it.
It can be hard, as I found with my poor investment in HMV (LSE: HMV). I'd thought it could profitably hang as a "last man standing" in the high street, making a decent profit margin from a smaller market.

The big fundamental change for me was when those margins dropped precipitously. But even then, it took some harsh words from experts on our discussion boards to really bring it home to me -- I sold for a loss, but I'd have done much worse had I hung on.
So keep your eye on the news, and if the fundamentals change for the worse, start thinking of hitting the "Sell" button.

Don't be afraid to take a loss

That reminds me of a key pitfall to avoid.

I was talking to some folks recently who were trying to decide which company in their portfolio to dump (because the money was needed for something else). They had some in profit and some in loss, and couldn't decide which one to get rid of.
And they were stuck on the psychological hurdle of not wanting to sell one of the losers and crystallize a loss. But that's a serious mistake, leading to an end result of selling your winners and keeping your losers.

A loss is a loss, whether you realise it in cash or hang on to the losing shares. In fact, when it comes to selling, the original price you paid is no longer relevant -- all that matters is where you expect the price to go in the future.
So the share to sell is the one that you think will reward you the least in the future, starting from today's price, regardless of whether it is currently in the red or the black.


Pretend you're starting again

How do you decide that, then?
One way is to treat it not as a decision of what to sell, but of what to buy if you didn't hold any shares.

Line up all the companies you currently hold, ignore their previous share price charts, analyse them again, and rank them in order of preference as if you were considering a new purchase of each.

Then the one to sell is the one you would be least likely to buy, no matter whether your actual holding is showing a profit or a loss.


Sell your overvalued ones

If we buy shares when we believe they are undervalued, the obvious corollary is that we should sell them when we believe they are overvalued -- and I don't get any medals for working that one out.
That's not actually so easy, because we tend to put most of our efforts into developing buying criteria, while we neglect selling criteria.

For example, growth investors following Jim Slater's approach will traditionally look for shares to buy with a PEG ratio of 0.7 or less. Over the years I've used all sorts of filters looking for that, plus a track record, plus a recent upswing in the price -- and other experimental criteria too, to find possibilities to buy.
But I've never set the opposite bounds for those measures, telling me what limits need to be breached in order to sell -- a PEG of 1.0? I really don't know, because I never worked it out.

It would make sense to develop overvaluation criteria at the same time as we develop our undervaluation criteria, don't you think? Few people do it.

The right frame of mind
Perhaps the best approach to this minefield is not to ask "Should I sell this share?", but instead "Where is the best place for my money?"
If you think of it that way, you can make the break from worrying about whether a specific share you own should be sold, and instead see the bigger picture of evaluating the whole of your investment portfolio.

i like! this good job! when everyone is happy and buying... sell when everyone is selling Buy! (at the bottom )