Learn when to sell stocks at the right time. Here’s our advice.

Investors often ask, "When do I sell?" There is no simple, fits-on-a-t-shirt answer to the question. But there are some helpful guidelines.

First, you’re never going to sell stocks at the top or buy at the bottom. As Bernard Baruch said, "That can’t be done — except by liars." That’s why we’re so selective about our stock market recommendations. The better the quality of the investments you buy, the less you have to lose by a failure to sell.

In fact, regardless of whether you are an aggressive or a conservative investor, the quality of your investments matters much more than your skill at selling.

Second, you should be quicker to sell aggressive stocks than conservative stocks. With stocks we rate as ‘Speculative’ or ‘Start-up’, it pays to apply our sell-half rule. That’s when you sell half of a stock that doubles in price.

Third, when a stock you own is getting taken over, it usually pays to tender to the takeover. That way, you get the full takeover price and you don’t pay brokerage commissions. Selling one month ahead of the takeover can cost you, say, 3%. On annualized basis, that’s like missing out on a 40% profit.

Many investors mistakenly assume that frequent profit-taking is the key to long-term success. Few brokers disagree, since they make money every time you buy or sell. But in the long run, taking profits simply because profits are available is going to cost you money. That’s because of the way the stock market works.

Stock prices rise 10% to 12% a year over long periods, on average, but individual cases and years vary widely. Even good stocks sometimes go sideways for decades, while others turn out to be ‘ten-baggers’ with gains of 1000%. To make serious profits, you need to hang on to your best performers for years. If you are too quick to sell stocks that have gone up, you may avoid some 20% setbacks, but you’ll also miss out on some 200% gains.

As one successful investor told me long ago, "I’m a rich man today because I was smart enough to buy Canadian Tire at $0.50, and too stupid to sell it at $2.00."

Knowing when to sell a stock

In any bull market, conservative investors often wind up selling their best stocks way too early. Often they do so because their stocks seem to have gone up “too far, too fast”, or because “I can buy it back on a dip”, or because “they’re no longer cheap”. These are all bad reasons to sell.

There’s a large random element in all stock-price changes. When it seems to you that stocks have gone up “too far, too fast”, it may mean you’re mistaken about how far or fast they should go up. You may be unaware of good things that are going on out of sight and raising their value. Perhaps these things have already happened, and the stock is going up as the news spreads.

In a secular bull market, “they’re no longer cheap” is a particularly insidious rationale for selling. As I’ve mentioned, most stocks are cheap at the start of a secular bull market. As time passes and the rise continues, investors get more confident. A virtuous circle develops. Investors are willing to pay ever higher prices for earnings, sales and improving prospects, and this leads to higher levels of earnings, sales and prospects, pushing investor confidence and stock prices higher still. Eventually the fun ends, of course, but conservative investors tend to under-estimate how long it can last.

If you sell when stocks are simply “no longer cheap” (or are “fully priced”, as a broker might put it), you will miss out on a lot of profit.”

Here are some guidelines to consider before you sell:

1. Be quicker to sell low-quality stocks, and slower to sell shares of high-quality stocks.
2. Before you sell, ask yourself this: does the stock have a poor outlook? Or do you want to sell because it just doesn’t fit your portfolio? If neither condition applies (and you just think it has gone up too far or too fast), then you should ask yourself if selling will improve your portfolio. Also ask yourself if you’re altogether willing to fiddle with the stock. It’s not only about knowing when to sell stocks but also if you should even touch them.
3. Avoid portfolio tinkering, especially when it comes to selling stocks that you feel have gone up too far and too fast. To succeed as an investor, you need a big winner in your portfolio from time to time. One key fact about big winners is that they tend to go up further and faster than most investors expect, and they keep doing it for years if not decades. If you sell them when they’re just getting started, you may never experience the joy or profit of having a big winner in your portfolio.

The trickiest part of investing

Deciding when to sell is the trickiest part of investing. We are programmed to run from danger, and every day the media brings new reasons to sell. But if you sell too often or too quickly, you’ll sell a lot of your best choices way too early, and you’ll never make any serious profits.

You can find numerous rules of thumb that aim to tell you when to sell. Most are based on chart-reading or technical analysis. All work at times, but none work consistently. When they fail, the profits you miss out on are likely to overwhelm any risk they help you avoid.

Our rule is that you can cut way down on times when you really need to sell by consistently buying well-established, high-quality stocks. These stocks can still drop sharply when the economy falters or bad news strikes, of course. But these are the stocks that snap back quickest and most reliably when the trend reverses and bad news comes less often. That’s why it generally pays to hold on to stocks like these through market setbacks. But you need to look at each case on its own, since there are exceptions.

How do you decide when to sell stocks? Share your thoughts in the comments!