Knowing when to sell stocks is as important as knowing when to buy them, if not more so.
Jesse Livermore once said something to the effect that Wall Street never changes—the stocks change, the investors change, but Wall Street itself never changes, because human nature never changes. And part of human nature is to resist doing what's uncomfortable; people usually look for explanations and reasons to justify doing what feels good.
In investing terms, what feels good to most investors is holding on to a big winner. (Or maybe we should say instead that what feels bad is selling a big winner…two sides of the same coin.) Usually the company behind the stock is popular, makes great products and has a dazzling story. Because of this, investors hesitate to bail out, rationalizing a stock's weakness with a variety of explanations, all of which will pass in time…or so they think.
With this in mind, it hasn't been a surprise to hear that many investors are still holding on to stocks that were once solid performers, despite their current poor action. We think that's a big mistake! Remember that no matter how great a stock has been or how great the company, even the best stock eventually tops out. And when our trend-following indicators turn decisively into the bearish camp, the odds favor these stocks having already hit their zenith.
Another nugget to remember is this: The worst-performing stocks in bear phases are often the ones that rose the most during the prior up cycle. Now, we're not going to get into a prediction game of when the market will turn down, how long it will slide, and how deep the drops in some of the big leaders will be. But we do know that at some point, the trend will turn down, and seeing how much water these big stocks have taken on, their runs will be over.
Once the market turns bearish, you should be looking to sell on rallies. (If you have a huge profit, you could consider holding a small position.) If by some chance these stocks buck the odds and head higher, you can always buy them back in the next bull phase.Another reason to sell those "old" winners: Even if they do head up, you probably won't want to buy them back. Why? Because there will be new leaders in the next advance, stocks that are just getting off their launching pads.
That's why we're spending time now searching for the next Apple, the next Monster Beverage, and the next Google, confident that the next upmove will be well worth the wait.
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