Lighten up ... rotate out ... take a little off the table.
Whatever phrase you use, it's "selling," and selling is tricky business. Before you reach for the ripcord, ask yourself:
"What if I had never sold a stock?"Honestly, would you have more money now, or less? I set out to answer that question myself this morning, and to back it up with hard data. Then I chickened out.
I knew the answer. If I had never sold a single share, I would be ... richer than I am today. How much richer? Much richer. I can't give you a precise figure, because I knew that once I saw it for myself, I would scream. How about you?
It gets worse and worse and worseI bought Cisco Systems (Nasdaq: CSCO) on a tip back in March 1990. I dumped it the next year for a quick double. OK, that's not exactly true. In fact, it's a lie. But I'm trying to make a point here.
Think about it: "I sold Cisco in 1991" is a pretty dark secret to have to reveal to another investor -- even if it was for a "quick double." And that's after the stock's plunge from its "tech bubble" peak.
For the record, I didn't flip Oracle (Nasdaq: ORCL) for a quick double, either. But I know how it feels. Pull up an eight-year chart for XTO Energy (NYSE: XTO). You'll see a 45-degree ramp skyward, connecting $3 to the ... top of the freakin' world. OK, only to nearly $60, but still.
You guessed it, I owned XTO for a few months back in 1999. Sold it for a quick double at $6 and change. Now it's in the high $50s. That's what I call the most painful double of my career.
"And what did you do with the cash?"How should I know? I probably bought another stock, but do you think it did as well as XTO? I know I didn't have a better stock in mind when I dumped it. I don't recall buying a house or furnishing one, either. (You'll see in a moment how this is relevant, believe it or not.)
No, I sold my meal ticket to book a nice gain. But what did I really "lock in"? Zip. You never do, unless you pull that money straight out of the market, which is not something you should consider now, especially if you're in your prime investing years.
That's right. I don't think you should try to time the market. A lot of folks claim to do it -- and a few actually seem to pull it off -- but not me. In fact, you might want to brace yourself because I'm going one giant step further than that.
I barely believe in valuationAt least, not when it comes to selling. Sure, stocks get so attractive sometimes you have to buy, for example, when the big banks were priced for bankruptcy in 1990. Citigroup (NYSE: C) got chopped nearly in half in a matter of months. Nutty -- but as a result I ended up with a boatload of Bank of America (NYSE: BAC).
In other words, "value" can work for you when buying. But the math gets dicey when it comes to selling -- especially growth stocks and especially big winners.
How about a funny example?A while back, I asked Motley Fool co-founder Tom Gardner for the one stock I should buy for my IRA. "I love Moody's," Tom replied, "but it's a little pricey at these levels." I bought it that instant. (Moody's is also off its recent highs, but it's still up more than 70% since I bought.)
What was I thinking? It's simple: I'll take a great company over a cheap stock any day. If a smart investor like Tom tells me the stock is "a little pricey," I love it that much more. The fact is, I've met some great stock pickers in my day but not many great sellers. Come to think of it, I've never met a great seller.
Promise me you won't get too cuteYes, Tom Gardner and his team at Hidden Gems have picked two dozen stocks that doubled over the past three years. I'm not surprised. They work hard and stick to the fundamentals. Plus, they're fishing a rich pond. Wall Street isn't snooping around these stocks yet, which creates market inefficiencies and pent-up demand.
So you don't write me off as a Tom Gardner cheerleader, I'll let you in on a secret: I use Tom and his team to lead me to undervalued small caps with big potential. From time to time, Tom will tell us to sell, but I don't usually listen -- and I probably won't in the future. Especially not if it's a winner. I never sell on valuation.
That's how tragedies happenAfter all, market-timers tell you that buy-and-holders like us get wiped out in bear markets. But then you pull up chart after chart of "boring" old stalwarts -- even so-called cyclicals like Alcoa (NYSE: AA) and 3M (NYSE: MMM) -- and what do you see? A gentle slope skyward. So how on Earth did anybody ever lose money on stocks like that? Good question.
Know what else looks like that? The S&P 500 -- aka the market. Granted, when you zoom in, the ride gets bumpier, but the long-term trend is up. So how do you lose money in the market? Well, you either buy at the top in 2000 -- and only at the top in 2000 -- or you get cute and buy and sell along the way.
Consider this approach instead: Sell stocks when you want to buy a house, furniture, or something else you'll pass on to your kids. Sell when you have too much in stocks and you want to buy some bonds, gold, or collectibles. Sell when you have too much of any one stock. But sell a stock only on valuation at your peril.
You don't have to go it aloneOK. Enough preaching. As I said, when you subscribe to a service like Tom Gardner's Hidden Gems, smarter investors than I will tell you when to lock in your gains. But the choice is always yours.
And when Tom and the gang tell you to buy, you'll want to listen. After all, as of today, their recommendations are up 52.1% on average. That's compared with a more "reasonable" 19.6% if you'd bought the S&P 500 instead. Are you earning returns like that?
You could be. If you're not, you should consider a free, 30-day trial to the complete Hidden Gems service right now. This way, you can verify everything I've just told you, and it won't cost you a dime. Whatever you decide, just promise me you won't get too cute.
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