“No one rings a bell at the top and no one rings a bell at the bottom” is an old saying on Wall Street.
That means it’s impossible to know when a stock has hit the bottom or when it’s hit the top.
We’ve already covered when you should buy a stock, but often much harder in the process is deciding when to sell a stock.
The best stocks are the ones you never want to sell. If you buy a good company at a good price, the value will continue to increase over your lifetime. Then the only question you have to ask yourself is do I want to realize some of those gains in order to buy something else, like a house or a new car.
Other times, we may believe some of our own stocks are overvalued and decide to sell in order to move that money into an undervalued stock.
However, that doesn’t always happen and sometimes we have to sell a stock that has not performed as we had hoped.
There are three questions you can ask yourself before you pull the trigger and sell a losing stock.
- “Was I wrong?” Sometimes you buy for the wrong reasons. Sometimes your idea doesn’t work out. If that happens, sell and move on. We all make mistakes. Accept it. Learn from it.
- “Has something changed?” Maybe you were right at the time, but something has changed. Has a visionary leader left the company? Have they failed to innovate and lost their sustainable competitive advantage? That’s when it’s time to sell.
- “Do I still believe in this company?” No matter what happens, if you still believe you own part of a great business… don’t sell. Often times, the market loses faith in a company based on a poor earnings report or some temporary problem. A long-term investor can weather these storms and wait for their stock to rebound.