investing

Know When to Sell a Stock

Don't let a stock's stumbles blind you to its long-term potential.

"I love Facebook,” Will Danoff, Fidelity Contrafund’s excellent manager, said at a recent investing conference. “Don’t sell after the first double.” The advice resonated with me, and not just because I, too, own Facebook (symbol FB). I thought it helped explain why Danoff, a value-conscious growth investor, has been so successful. Like Warren Buffett, he has a strong bias toward holding a stock even when it encounters turbulence. “I don’t want to get shaken out of a stock if I like the long-term story,” Danoff once said.

Too many of us have subconscious sell rules that hurt our results. For instance, we often sell because of recent moves in a stock’s price. In 2000, I showed my investing genius by buying health insurer Humana (HUM) at $6. The stock now trades at $188, and Aetna has agreed to buy Humana for $230 per share. But I never brag about my coup because I sold Humana at $15 two years after I bought it. (Current prices are as of July 2.)

In selling Humana way too soon, I focused far too much on the stock’s performance (heroic), my holding period (long enough to qualify for favorable capital-gains tax treatment) and my ego (I was a proud seller). We all know people who think a loss isn’t a loss until you take it. Others, channeling my Humana experience, believe a profit isn’t real until you ring the register. A rational long-term investor such as Charlie Munger, Berkshire Hathaway’s vice chairman, would say that when it comes to making a sell decision, both views are equally delusional.

I invested in Buffalo Wild Wings (BWLD), a thriving sports-bar franchise, a week after it went public in 2003. A few months later, I freaked out when the firm said rising chicken wing prices would clip earnings. So, like a chicken, I sold and took my 30% profit. The stock has since risen more than 10-fold. The temporary commodity spike blinded me to Wild Wings’ long-term growth potential. Such price fluctuations are inevitable and are usually meaningless.

But sometimes there are better reasons to sour on a stock. I invested in Constellium NV (CSTM), a Netherlands-based fabricator of aluminum products, in early 2014 at $23. I was sitting on a nice profit when I read in August 2014 that Alcoa (AA) would compete against Constellium by getting into the aircraft-engine-parts business. Then Constellium reported punk earnings and gave a bleak forecast about future results. I sold at $29 a share. Since then, every earnings report has been catastrophic, and the stock now sells for $11.

Focus on the call. Sometimes a single earnings call should prompt a sale. I bought UCP (UCP), a land-rich home builder, in March 2014 at $14. The premise: UCP would sell to developers some parcels of land it had acquired cheaply and build some homes itself. But on its May 2014 call with analysts and investors following the release of first-quarter results, UCP said it had sold just $200,000 worth of land—down a staggering 97% from the same quarter in 2013—and exactly 52 homes on the 7,931 lots it controlled. On the call, executives sounded like a group of stoners. “Hey, man, we’ll get around to building the homes someday. You investors just need to chill,” they might as well have said. Not feeling mellow, I sold the next day for $13, taking a small loss. The shares now fetch just under $8.

Reviewing past sell decisions has led me to three new rules. First, if a company has a real business with great growth potential, you should cut it some slack. Second, always check to see if powerful emotions are trampling logic. And finally, if a company is floundering while most of its peers are prospering, acknowledge that you have a lemon and don’t try to make lemonade out of it. Toss it in the trash.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
How to Know When You Can Retire
retirement

How to Know When You Can Retire

You’ve scrimped and saved, but are you really ready to retire? Here are some helpful calculations that could help you decide whether you can actually …
January 5, 2022
The 10 Best Closed-End Funds (CEFs) for 2022
CEFs

The 10 Best Closed-End Funds (CEFs) for 2022

These high-yielding CEFs won't just significantly boost your portfolio income. They'll also allow you to buy their underlying stocks and bonds at a di…
January 12, 2022

Recommended

Could the Stock Market Crash for Real? Here’s How to Prepare
investing

Could the Stock Market Crash for Real? Here’s How to Prepare

After a long march to record heights, the stock market tripped into correction territory in January. How should you react? Thoughtfully.
January 25, 2022
The 60/40 Portfolio Is Dead. Long Live 33/33/33.
investing

The 60/40 Portfolio Is Dead. Long Live 33/33/33.

A portfolio of stocks and bonds used to be the gold standard, but it just doesn’t cut it anymore. It’s time to throw some alternative investments into…
January 25, 2022
9 High-Yield Stocks Doling Out 5% or More
dividend stocks

9 High-Yield Stocks Doling Out 5% or More

These high-income stocks deliver on headline yield, offering up between roughly 5% and 9%. They also have the financial fortitude to keep those payout…
January 24, 2022
8 Facts You Need to Know About Stock Market Corrections
Markets

8 Facts You Need to Know About Stock Market Corrections

Scary as they are, drawdowns are a normal part of the investing process. Having a financial plan in place and sticking to it is every investor's best …
January 23, 2022