Investors often wonder just how long they should hold on to an investment, asking a simple question “What is your sell strategy?” Ideally, you want to hang on to an investment as long as it meets your investment objectives.
Many people choose to sell a stock when it reaches a target price, which if achieved, would result in recognizing the best possible outcome for his or her investment. You may also decide to sell when your investment does not have the upside growth potential in its industry that its competitors have. Other investors may have minimum criteria investments must meet in order to be held.
At Henssler Financial, we only buy stocks at least rated “A” by Value Line for financial strength, at least “2” by Value Line for safety, or at least “A-” by Standard & Poor’s for quality. When a holding falls below our criteria, we sell it as soon as practical.
Another reason to sell is a fundamental shift in a company’s strategy. For example, we used to hold Watson Pharmaceuticals, Inc. (NYSE: WPI), a generic drug manufacturer. Watson’s management decided to buy a branded pharmaceutical maker, which changed their business model. The reason we held Watson was for their generic line. The company was taking a new direction, and we did not like where it was going. We decided it was time to sell.
We have also sold a stock when we saw signs of management incompetence or dishonesty. In the case of American International Group, Inc. (NYSE: AIG), the company came out quarter after quarter announcing that they found more and more bad loans. This to us was a sign of incompetence, and we sold well before the insurer needed a bailout. Another example is when management is not up front with Wall Street. If a company were to announce today that everything is fine and then in two weeks report earnings were down 17% that is dishonest management.
There are active and passive sell strategies. In a passive sell strategy, you sell when something changes that is an absolute within your financial strategy. For example, when a holding falls below your minimum investment strength criteria, you sell. Another absolute might be if you set a maximum position weight at 5%, when a holding grows to more than 5%, you would sell a portion.
Active sell strategies are more difficult as you are required to make decisions based on research. You have to determine which companies will grow faster or which ones will have better prospects. This can be a complicated decision and is often considered the art form of portfolio management.
Let’s consider one of our own examples: The Home Depot, Inc. (NYSE: HD). When Home Depot was tremendously beat up in the market, we bought it. We owned the stock from the bottom up to a significant amount. Eventually, it became apparent to us that while we liked the business of Home Depot, their competitor Lowe’s Companies Inc. (NYSE: LOW) was significantly cheaper and had a higher growth rate. We then sold Home Depot and bought Lowe’s. For us, it turned out to be the correct decision.
Another reason to sell can be tax management. As part of your tax strategy, you may choose to sell a stock for a loss to offset capital gains or ordinary income. This strategy has nothing to do on whether or not you like the stock or want to continue to own it. However you need to wait 31 days before buying the stock back to recognize the loss.
We think the true difficulty for most investors is for people to admit defeat and sell a dog. No one wants to admit failure. The psychological aspects of the stock market are all over the place. It is very difficult to sell something that is a loser. Never believe someone who tells you that they always pick winners. Everyone has had a loser.
The worst loser in our history was Marsh & McLennan Companies, Inc. (NYSE: MMC). We watched the company for two years before deciding it was the right time to buy. We bought the stock at about $50 a share. The very next day, Eliot Spitzer, the New York Attorney General at the time, announce he was filing both criminal and civil lawsuits against Marsh & McLennan relating to what the insurance industry refers to as “contingent commissions,” which Spitzer believed were actually kickbacks and payoffs to steer business toward a particular insurance company.
We watched as the stock plummet more than 40% to below $30 per share. We sold it that day. It hurt tremendously to admit such a mistake, but the news and outlook was an indication that the stock was not going to come back. Sometimes you do not know what is going on in a company, and often stocks fall on no news at all.
You have to determine the difference between price movements and loss of value. If the stock price drops and it is still a good value, why would you sell? It could likely be a buying opportunity.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
