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May 26, 1999 Buying stocks seems to be easier than selling them - and buying ain't easy! If your stock goes down, you hate to take a loss - maybe it'll come back. If your stock goes up, hey you're onto a winner, you're not gonna sell that. So maybe the answer is to be like Warren Buffett and never sell. There's even a tax advantage: the "angel of death" exemption wipes out all the capital gains tax you would owe upon your death. But even wily old Mr. Buffett does sell now and then. The questions to ask are why and when. I can't say my own investment experience has been that good on sell timing but I may have learned a thing or two in the school of hard knocks. The first thing I learned on the campus of good old SOHK is: don't bail out early. If you buy a stock, hold for at least a year before considering selling. Of course, this has tax advantages - gains on stocks held less than a year are taxed at a higher rate - but the main point is that you should be a patient long term investor. It's very unlikely that the price you buy at will be the lowest it ever trades at in the future - nobody's that good a stock picker. Chances are it will trade below your buy price in the weeks and months after you buy. You may get anxious, sour on the stock and sell. On the other hand, if it goes up a little from your buy point, you may be tempted to grab the money and run. If you start thinking scared like this, you'll just wind up a short term trader. Don't put money in the market that you can't afford to lose. Short term trading is a losing proposition for most of us, because of higher taxes, higher transaction costs, and worst of all, a lack of good short term info that others don't have on which to base these short term trades. Those transaction costs aren't just the commissions you pay. You must also include the spread - the difference between the bid and ask price. If you buy at the market you'll pay the asking price; if you sell, you'll only get the bid price. So quit worrying about that new purchase for a year. After that first year, you should make an evaluation to see if it should stay in your portfolio. Does it continue to make sense as an investment for the reasons that made you buy it in the first place? Note that you have to remember why you bought it - an easy thing to forget, alas. If it does not continue to make sense, then you must have found out something bad about the stock that you didn't know when you bought it. Was this bad thing something that a more informed investor would have known, or is it a new development? This distinction is the second important thing I learned at SOHK. If it was something you should have known, but didn't, then don't sell the stock. If it's some new development that makes a hash of your original vision of the future, then sell. For instance, let's say you find out that the CEO is a fool. This is something that would be known to the market - it's only news to you. If you hold on, something good may happen, like the CEO being fired and replaced by a better one. The other reasons you liked the stock are still valid. But instead let's say the CEO drops dead. No one could have known this. If your reason for liking the stock was your respect for the CEO, it's time to sell. Don't let a good profit turn into a loss. If your stock is well up, say 100% or more, make a mental stop to sell if it falls back to some intermediate price, like 40% up. You could even make this an actual GTC stop loss order. Even losers have advantages. Come December, think about selling some of your losers to generate capital losses. These can be used to offset capital gains and reduce your tax burden if you also sold some winners. The third thing I learned at SOHK is don't give stock tips to friends and relatives. Lord help you if you're wrong and it goes down, of course. Even if it goes up, you're on the hook for saying when to sell, which could also be wrong. The only good tips are stocks that go up strongly from day one and continue to rise rapidly forever. Fat chance of that. Today's close: Dow 10702, S&P500 1304, NASDAQ 2426 All-time High: Dow 11130, S&P500 1362, NASDAQ 2677 September low: Dow 7539, S&P500 956, NASDAQ 1375 The market peaked in early May and now we're seeing a secondary decline. The Internet stocks have been hit pretty hard while the blue chips have done better - pretty predictable. It's not much of a dip at this point and it's about time for a drop anyway. Perhaps this one will drive the Dow below 10,000 and create some bargains. © Copyright 1999 by Richard Gillmann. All Rights Reserved. |