When should I sell stock I bought as an investment?
At heart, I’m a “dividend growth” investor. So, logically, when a stock ceases to be a dividend growth stock I should sell it. But, economic cycles and temporary misfortunes don’t necessarily turn a good company bad. So, under what conditions should I decide that a formerly good dividend growth stock has ceased to be one?
In my previous two posts I identified four analytical criteria and three qualitative reasons I’ll use to make that decision. But there are other reasons I‘ll consider selling that are unrelated to a specific stock.
H. I’ll sell when I believe there is a market crash or a significant correction pending and I want to preserve my capital for reinvestment at substantially lower prices.
This happened in 2008. Although I was slow to recognize the crash, I did manage to sell everything I wanted to sell about 30% into the downward leg. I started buying again near the bottom and continued buying until the Dow approached 11,000. This enabled me in 2009 and 2010 to more than make up for my 2008 losses.
I believe we are on the verge of repeating the crash. Consequently, over the past weeks I’ve sold most of my equity positions so I’ll be prepared to start buying again when the market is 20% to 30% lower.
I don’t know how to time the market better than anyone else. But I’m convinced that the current economic “recovery” is phony and more importantly – it’s over. I’ve no idea where the bottom will be. That’s why I’ll start buying when the market is 20% to 30% down and I’ll continue buying a little at a time while events play out.
I hope to “dollar cost average” the market bottom and “bracket it” in field artillery terms.
I. I’ll sell my weakest investments when I need cash to invest in a much better opportunity.
When I identify a strong new investment opportunity and I have insufficient cash available to purchase it, I’ll chose one or more of my least attractive current positions to sell. Using the proceeds of the sale, I’ll buy the new stock.
In practice, I’m never fully invested. I maintain a cash reserve in case an extraordinary opportunity presents itself. However, if my reserve is at my minimum target value, I’ll still sell my weakest investments to raise additional cash for the new stock.
Since the recent rally peaked, I’ve steadily increased my cash reserve in preparation for the expected downturn. As my target cash reserve figure increased, there have been multiple occasions when I sold weaker investments to purchase stronger ones.
J. I’ll sell my weakest investments if an emergency situation requires more cash than I have available.
If a family disaster occurs selling investments could become necessary. However, my wife & I maintain emergency accounts as well as insurance that we hope will prevent this situation.
Retirement Income
Most people would include generating income in retirement as a reason to sell stocks; not me. I buy only dividend stocks and I plan to use only the dividends as retirement income. I’ll let the stocks appreciate over time and continue increasing their annual dividend payouts.
Summary of the Reasons I Will Sell Stocks
A. The company stops paying a dividend.
B. The stock’s price increases such that the dividend yield falls below 2% and the P/E ratio rises above 25.
C. The company’s earnings decline enough that the dividend payout ratio exceeds 100%.
D. The stock’s “Financial Score” is a negative number.
E. The company’s survival is threatened by a very large legal liability.
F. The company enters into a major merger agreement.
G. The stock’s total return falls below 10%.
H. I’ll sell when I believe there is a market crash or a significant correction pending and I want to preserve my capital for reinvestment at substantially lower prices.
I. I’ll sell my weakest investments when I need cash to invest in a much better opportunity.
J. I’ll sell my weakest investments if an emergency situation requires more cash than I have available.
I hope you find this series of posts on “When to Sell” interesting. Writing it has clarified my thinking about selling stock. For me, it was a profitable exercise.
Link to Topics in the Special Report: "When to Sell"
Thursday, August 26, 2010
Thursday, August 19, 2010
When to Sell: More Reasons to Sell a Stock
When should I sell stock I bought as an investment?
At heart, I’m a “dividend growth” investor. So, logically, when a stock ceases to be a dividend growth stock I should sell it. But, economic cycles and temporary misfortunes don’t necessarily turn a good company bad. So, under what conditions should I decide that a formerly good dividend growth stock has ceased to be one?
In my previous post I identified four criteria I’ll use to make that decision. But there are other, less analytical, reasons I may consider selling such as:
E. The company’s survival is threatened by a very large legal liability.
The BP oil spill in the Gulf of Mexico springs to mind; as do Toyota’s recent multiple recalls. In the case of BP I actually did sell when it looked to me that the magnitude of BP’s growing potential liability could bankrupt the company.
I sold my BP shares at a 10% loss and ended the transaction a happy man. I didn’t own Toyota so, I don’t know if I would’ve sold my position or doubled down when the second recall was announced. By the time of the fourth recall, however, I’m pretty sure I’d have bailed.
F. The company enters into a major merger agreement.
I own shares in CenturyLink (CTL) and I’m very happy collecting its big dividends every quarter. Nevertheless, when CenturyLink announced its pending merger with Qwest I immediately started thinking of cashing out my entire position.
Without any details of the planned merger, I anticipated that Qwest was buying CenturyLink. But, when I read the information packet sent to shareholders I was pleasantly surprised to discover CenturyLink is buying Qwest, and for small fractional shares of CenturyLink for each share of Qwest.
I’m still a little concerned that the merger might screw up CenturyLink’s future dividend increases. But, I think the odds are that CenturyLink will continue to grow its payout as a result of the merger. So, although I certainly considered selling, in the end I chose to retain my CTL shares.
Last year ExxonMobil (XOM) entered into an agreement to buy XTO Energy (XTO). XTO was one of my favorite and most profitable holdings at the time and I was sorely disappointed at the announcement. I didn’t hesitate to pull the trigger on XTO, however. I sold my shares within the week. XTO was going away and there was no help for it.
G. The stock’s total return falls below 10%.
I recently sold my positions in several stocks because my projection of their total return was less than 10%. I estimate total return by adding the current dividend yield to the five year earnings growth rate (earnings not earning per share).
I nearly sold my Johnson and Johnson (JNJ) stock for the same reason. But, it’s such a good dividend payer that I haven’t yet been able to pull the trigger on that sale. I certainly considered it though.
As you can see, these three additional reasons to sell are not as conclusive as the previous set. They are, however, reasons I consider valid. They will cause me to consider selling.
Next, I’ll review reasons to sell stock that are unrelated to the specific company,
Link to Topics in the Special Report: "When to Sell"
At heart, I’m a “dividend growth” investor. So, logically, when a stock ceases to be a dividend growth stock I should sell it. But, economic cycles and temporary misfortunes don’t necessarily turn a good company bad. So, under what conditions should I decide that a formerly good dividend growth stock has ceased to be one?
In my previous post I identified four criteria I’ll use to make that decision. But there are other, less analytical, reasons I may consider selling such as:
E. The company’s survival is threatened by a very large legal liability.
The BP oil spill in the Gulf of Mexico springs to mind; as do Toyota’s recent multiple recalls. In the case of BP I actually did sell when it looked to me that the magnitude of BP’s growing potential liability could bankrupt the company.
I sold my BP shares at a 10% loss and ended the transaction a happy man. I didn’t own Toyota so, I don’t know if I would’ve sold my position or doubled down when the second recall was announced. By the time of the fourth recall, however, I’m pretty sure I’d have bailed.
F. The company enters into a major merger agreement.
I own shares in CenturyLink (CTL) and I’m very happy collecting its big dividends every quarter. Nevertheless, when CenturyLink announced its pending merger with Qwest I immediately started thinking of cashing out my entire position.
Without any details of the planned merger, I anticipated that Qwest was buying CenturyLink. But, when I read the information packet sent to shareholders I was pleasantly surprised to discover CenturyLink is buying Qwest, and for small fractional shares of CenturyLink for each share of Qwest.
I’m still a little concerned that the merger might screw up CenturyLink’s future dividend increases. But, I think the odds are that CenturyLink will continue to grow its payout as a result of the merger. So, although I certainly considered selling, in the end I chose to retain my CTL shares.
Last year ExxonMobil (XOM) entered into an agreement to buy XTO Energy (XTO). XTO was one of my favorite and most profitable holdings at the time and I was sorely disappointed at the announcement. I didn’t hesitate to pull the trigger on XTO, however. I sold my shares within the week. XTO was going away and there was no help for it.
G. The stock’s total return falls below 10%.
I recently sold my positions in several stocks because my projection of their total return was less than 10%. I estimate total return by adding the current dividend yield to the five year earnings growth rate (earnings not earning per share).
I nearly sold my Johnson and Johnson (JNJ) stock for the same reason. But, it’s such a good dividend payer that I haven’t yet been able to pull the trigger on that sale. I certainly considered it though.
As you can see, these three additional reasons to sell are not as conclusive as the previous set. They are, however, reasons I consider valid. They will cause me to consider selling.
Next, I’ll review reasons to sell stock that are unrelated to the specific company,
Link to Topics in the Special Report: "When to Sell"
Friday, August 13, 2010
When to Sell
Links to Special Topics in the Discussion of "When to Sell" a "Dividend Growth Investment
When to Sell: What Are the Right Reasons?
When to Sell: Why Did I Sell?
When to Sell: When Should I Sell?
When to Sell: More Reasons to Sell a Stock
When to Sell: Reasons to Sell that are Unrelated to the Stock
When to Sell: What Are the Right Reasons?
When to Sell: Why Did I Sell?
When to Sell: When Should I Sell?
When to Sell: More Reasons to Sell a Stock
When to Sell: Reasons to Sell that are Unrelated to the Stock
When to Sell: When Should I Sell?
When should I sell stock I bought as an investment?
As I’ve stated in previous posts, at heart, I’m a “dividend growth” investor. So, logically, when a stock ceases to be a dividend growth stock I should sell it.
Economic cycles and temporary misfortunes, however, don’t necessarily turn a good company bad. So, at what point should I stop giving an investment the “benefit of the doubt”? The answer to this question is different for different people.
Traders might place stop loss orders at 10% or 20% below current asking price and revise the orders upward as the stock goes up. The stop loss strategy tracks the sentiment-driven price of the stock, but not its fundamentals.
I’ve already proven that I lack the temperament of a trader. I’m successful with a long term fundamental approach – hence my attraction to dividends.
Along with Warren Buffet, my favorite holding period is forever. So, for me, the point when I’ll give up on an investment is partially answered by the following.
I’ll determine that a stock’s no longer appropriate for my “dividend growth” investment portfolio if:
A. The company stops paying a dividend.
B. The stock’s price increases such that the dividend yield falls below 2% and the P/E ratio rises above 25.
C. The company’s earnings decline enough that the dividend payout ratio exceeds 100%.
D. The stock’s “Financial Score” is a negative number.
As I thought through this partial list of sell signals, I revised my stock analysis workbook to measure them and generate a visible sell signal when they occur.
In my next post I’ll explore further reasons I should sell an investment stock.
Link to Topics in the Special Report: "When to Sell"
As I’ve stated in previous posts, at heart, I’m a “dividend growth” investor. So, logically, when a stock ceases to be a dividend growth stock I should sell it.
Economic cycles and temporary misfortunes, however, don’t necessarily turn a good company bad. So, at what point should I stop giving an investment the “benefit of the doubt”? The answer to this question is different for different people.
Traders might place stop loss orders at 10% or 20% below current asking price and revise the orders upward as the stock goes up. The stop loss strategy tracks the sentiment-driven price of the stock, but not its fundamentals.
I’ve already proven that I lack the temperament of a trader. I’m successful with a long term fundamental approach – hence my attraction to dividends.
Along with Warren Buffet, my favorite holding period is forever. So, for me, the point when I’ll give up on an investment is partially answered by the following.
I’ll determine that a stock’s no longer appropriate for my “dividend growth” investment portfolio if:
A. The company stops paying a dividend.
B. The stock’s price increases such that the dividend yield falls below 2% and the P/E ratio rises above 25.
C. The company’s earnings decline enough that the dividend payout ratio exceeds 100%.
D. The stock’s “Financial Score” is a negative number.
As I thought through this partial list of sell signals, I revised my stock analysis workbook to measure them and generate a visible sell signal when they occur.
In my next post I’ll explore further reasons I should sell an investment stock.
Link to Topics in the Special Report: "When to Sell"
Friday, August 6, 2010
When to Sell: Why Did I Sell?
Twenty-three years ago I dabbled in trading individual stocks. It was a lot harder then, before the Internet. I’d read a couple of books on the stock market and investing and I’d made some money earlier investing in a front loaded mutual fund every month for about five years.
So, I thought pretty highly of my investing skills; I was a natural!
I actually did have decent reasoning ability and without training but with eight years of working for General Motors I decided I could ride the cyclical automotive stocks. I looked at the price charts – not the “technical” charts – to see where the stock was relative to its tops and bottoms of the past several cycles.
I bought some GM stock when it seemed below its average price and I sold some when it seemed above its average. And I made a little money.
I bought some Jaguar when it seemed low. And, I got really lucky when Ford tendered for Jaguar. I sold my stock to Ford for a very nice profit.
Then I bought some Western Union when it seemed low – but it went lower & I bought some more. Then it went to zero and I lost my entire investment.
It wasn’t too bad though. I sold my remaining position in GM and overall I broke even on two years of trading. I learned that I wasn’t, after all, a natural.
During this period I sold because:
a. My stock was near a cyclical top.
b. I received a tender offer.
c. I gave up investing in individual stocks
For many years thereafter, My only investments were in themutual funds of my 401k retirement plan.
Then I discovered Jim Cramer. Say what you will about Jim Cramer, but he says his mission is to get people interested in stock market investing and that’s exactly what he did for me. I started trading a little bit based on things he said on his television program.
In 2005, I made a little money overall. I also discovered that Cramer’s relatively short holding periods of one to three months simply didn’t work for me. And, I started to diverge for his teachings.
By 2007 I’d converted my Traditional IRA and my Roth IRA into self-managed brokerage accounts and, along with the much smaller taxable account I started with, I was managing a portfolio containing 30+ stocks – though the total value is and remains quite modest.
I’d discovered long term holding periods and dividends. I was constantly changing my criteria for selecting stocks and with every change I sold stocks that no longer fit with my new thinking.
During this process, I sold because:
d. I made 10% to 20% and wanted to lock in the profit.
e. I lost money and was afraid I’d lose more.
f. The stock seemed to be going no where and I wanted to use the money to buy something else.
By 2008, my stock selection was becoming more of a system; not fully developed but no longer whimsical.
Then, the market crashed. I was heavily invested in dividend paying financials; banks, insurance companies, and business development companies (BDC’s). These stocked started down and at first I bought more.
During a causal conversation with my wife, she suggested that perhaps I should sell my bank stocks. I defended them as being the best bank stocks out there. But, a few days later, recognizing her intuition as better than my own and having no systematic criteria for selling, I sold all of my bank stocks and most of the other financials.
This decision saved my portfolio. Even though I’d already lost money on all of the financial stocks – as well as everything else; I created a cash reserve that I started redeploying as the market bottomed.
As the rally progressed I continued to buy a little bit at a time and I continued to revise my buying criteria. As my criteria changed I sold stocks that didn’t fit my new criteria. I didn’t always sell every stock that didn’t fit. There were a few that I just liked.
Often, during later criteria changes one of the stocks I just liked would again meet my ever changing selection process and I was glad I didn’t sell.
As the rally started to peter out and I came to believe there would eventually be a major correction or another crash, I sold most of the remaining stocks that did not meet my selection criteria.
The frequency and scope of the changes to my evolving system were diminishing. My stock selection process was becoming clearer and my confidence in it were increasing and I decided I needed, once again, to build up a cash reserve so money will be available to redeploy when the market tanks.
That’s where I’m at as I write this piece.
In this most recent phase I sold because:
g. My wife’s intuition suggested I should.
h. My criteria for selecting stocks as investments changed.
i. To rebuild a cash reserve in order to take advantage of an anticipated market downturn.
These are the reasons I’ve sold in the past. Now why should I sell in the future?
Link to Topics in the Special Report: "When to Sell"
So, I thought pretty highly of my investing skills; I was a natural!
I actually did have decent reasoning ability and without training but with eight years of working for General Motors I decided I could ride the cyclical automotive stocks. I looked at the price charts – not the “technical” charts – to see where the stock was relative to its tops and bottoms of the past several cycles.
I bought some GM stock when it seemed below its average price and I sold some when it seemed above its average. And I made a little money.
I bought some Jaguar when it seemed low. And, I got really lucky when Ford tendered for Jaguar. I sold my stock to Ford for a very nice profit.
Then I bought some Western Union when it seemed low – but it went lower & I bought some more. Then it went to zero and I lost my entire investment.
It wasn’t too bad though. I sold my remaining position in GM and overall I broke even on two years of trading. I learned that I wasn’t, after all, a natural.
During this period I sold because:
a. My stock was near a cyclical top.
b. I received a tender offer.
c. I gave up investing in individual stocks
For many years thereafter, My only investments were in themutual funds of my 401k retirement plan.
Then I discovered Jim Cramer. Say what you will about Jim Cramer, but he says his mission is to get people interested in stock market investing and that’s exactly what he did for me. I started trading a little bit based on things he said on his television program.
In 2005, I made a little money overall. I also discovered that Cramer’s relatively short holding periods of one to three months simply didn’t work for me. And, I started to diverge for his teachings.
By 2007 I’d converted my Traditional IRA and my Roth IRA into self-managed brokerage accounts and, along with the much smaller taxable account I started with, I was managing a portfolio containing 30+ stocks – though the total value is and remains quite modest.
I’d discovered long term holding periods and dividends. I was constantly changing my criteria for selecting stocks and with every change I sold stocks that no longer fit with my new thinking.
During this process, I sold because:
d. I made 10% to 20% and wanted to lock in the profit.
e. I lost money and was afraid I’d lose more.
f. The stock seemed to be going no where and I wanted to use the money to buy something else.
By 2008, my stock selection was becoming more of a system; not fully developed but no longer whimsical.
Then, the market crashed. I was heavily invested in dividend paying financials; banks, insurance companies, and business development companies (BDC’s). These stocked started down and at first I bought more.
During a causal conversation with my wife, she suggested that perhaps I should sell my bank stocks. I defended them as being the best bank stocks out there. But, a few days later, recognizing her intuition as better than my own and having no systematic criteria for selling, I sold all of my bank stocks and most of the other financials.
This decision saved my portfolio. Even though I’d already lost money on all of the financial stocks – as well as everything else; I created a cash reserve that I started redeploying as the market bottomed.
As the rally progressed I continued to buy a little bit at a time and I continued to revise my buying criteria. As my criteria changed I sold stocks that didn’t fit my new criteria. I didn’t always sell every stock that didn’t fit. There were a few that I just liked.
Often, during later criteria changes one of the stocks I just liked would again meet my ever changing selection process and I was glad I didn’t sell.
As the rally started to peter out and I came to believe there would eventually be a major correction or another crash, I sold most of the remaining stocks that did not meet my selection criteria.
The frequency and scope of the changes to my evolving system were diminishing. My stock selection process was becoming clearer and my confidence in it were increasing and I decided I needed, once again, to build up a cash reserve so money will be available to redeploy when the market tanks.
That’s where I’m at as I write this piece.
In this most recent phase I sold because:
g. My wife’s intuition suggested I should.
h. My criteria for selecting stocks as investments changed.
i. To rebuild a cash reserve in order to take advantage of an anticipated market downturn.
These are the reasons I’ve sold in the past. Now why should I sell in the future?
Link to Topics in the Special Report: "When to Sell"
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