A large number of stocks fall into a grey area. We wouldn’t advise buying them, but they are “okay to hold,” in our view.

We often recommend to TSI Network investors that it’s “okay to hold a stock”. To understand our recommendation, you need to consider it in light of the choices that you’ll find in the market as an investor.

We continually scour the Canadian and U.S. markets for stocks to recommend as buys to our clients. We generally get excited about only a handful—that is, excited enough to recommend them as buys in our publications.

Most stocks we look at have one or more serious flaws, in our view. If you ask about stocks like these, we’ll tell you to sell.

However, a large number of stocks fall into a grey area. We wouldn’t advise buying them, but they are “okay to hold,” in our view. (Suppose an Inner Circle member says, “Forget “okay to hold,” just tell me if it’s a buy or a sell.” In that case, we are always going to translate “okay to hold” as sell. We just don’t feel strongly enough about these stocks to advise buying.)

Of course, you may feel more positive about some of our recommendations to hold a stock than we do. If you want to hold them in your portfolio, we can’t voice any strong objection. We simply don’t share your enthusiasm. We feel you’ll find better choices among the buys we currently recommend in our newsletters.

Note that when we say “okay to hold”, we mean something substantially different from when we recommend a stock as a “hold” in our newsletters or hotlines. In our newsletters and hotlines, it means we recommended the stock as a buy in the past, and we may recommend buying it again in the future. But at the moment, we see better choices for new buying elsewhere in the newsletter.

Here too, however, you need to apply our advice to your own situation.

If you mostly own stocks we see as “holds,” you should consider selling some of them and replacing them with stocks we see as buys. Of course, before you sell, you need to consider any capital gains tax liability that the sale will involve. You’ll need to weigh that tax cost against the benefit that the transaction will bring to your portfolio. You’ll also need to consider the effect that the sale of one stock and buying of another will have on your portfolio. You’ll need to consider how well the revised portfolio lines up with your resources, goals and temperament.

The complications are endless, but the basic rule is simple. When you own good stocks, it generally pays to hold on until you have a good reason to sell. When you own mediocre or speculative or bad stocks, the reverse is true. It generally pays to sell unless you see a good reason to hang on.

Building a “buy and hold a stock” portfolio

Of course, there are a variety of ways to build an investment portfolio. Some work better than others. But our “buy and watch closely” approach has done well for our portfolio management clients over the past few decades. We recommend this approach for our readers as well. We start by applying our three-part Successful Investor rule for portfolio construction:

1. Invest mainly in high-quality, well-established companies, with a history of earnings if not dividends;
2. Diversify across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
3. Downplay or stay out of stocks that are in the broker/media limelight. This limelight raises investor expectations to dangerous levels. When stocks fail to live up to those heightened expectations, share-price slumps can be swift and brutal.

Does our advice on when to hold a stock make sense to you? What other rules do you follow when you hold a stock? Please share your experience in the comments.