Nobody wants to be on the losing end of a stock market investment, but it happens. The good news is you can avoid potential financial devastation by recognizing a few key signs that often indicate when it’s finally time to sell stock in a company. Here are seven of the biggest:
Your Exit Strategy Says It’s Time
Gambling is tricky. When I play blackjack at the casino, I always tell myself that I’ll leave the table if I lose the money I started with, or if I make a predetermined profit off my initial investment — but it rarely works out that way. My own greed and the free-flowing booze almost always derails my plans and I keep pressing my luck even after I’ve reached my “win” or “loss” thresholds. That’s exactly what you don’t want to do with your stock.
According to finance expert David Bakke, “It’s a good idea to adopt an exit strategy when buying stocks for planning purposes,” he says. In other words, on the day you buy a stock, set your buy and sell price thresholds and then stick to it.
The Company’s Strategic Positioning Has Deteriorated
The technology industry can change on a dime; one day the tech is groundbreaking, the next day it’s useless. Marvin H. Doniger, author of A Common Sense Approach to Successful Investing, suggests jumping ship when the latter happens. If you hold stock in a company whose intellectual property or products are being phased out in favor of something else — and your company doesn’t have a competing concept — hit the road before the company takes a dive.
The Reason You Bought Is No Longer Valid
Perhaps you bought a firm’s stock because they were developing a new drug that showed promise. But if that drug fails its tests, says Doniger, you really don’t have a reason to hold on to the stock anymore. You bought into it because you thought it would succeed. If that doesn’t happen, then bid the stock adieu.
Another reason to sell would be if the company is experiencing a decline in sales, revenues, profits, or cash flow. It may also be time to sell after your company is bought out, or merges with another company.
Key Employees Leave the Company
When there’s a shake-up at the company, investors get weary — especially when key employees responsible for the company’s success are taking a walk.
“Will Berkshire Hathaway’s performance be as stellar as it was after Warren Buffett leaves?” Doniger asks. “Probably not. Sell.”
The Company Starts Making Uneven Moves
When usually calm people start acting erratic, it raises your suspicion, right? Something must be up! Similarly, if a company you invested in starts taking risks that are out of character, watch out.
“The best way to know if it’s time to sell a stock is if the fundamentals change,” says entrepreneur and private investor AJ Saleem. “For example, if you’re holding a company that’s extremely conservative about acquisitions, but then starts acquiring random companies, it’s time to sell.”
Consumer Tastes Change Industry Dynamics
Here today, gone tomorrow is an increasing trend within today’s retail industry. We’ve seen the demise or near-demise of retail giants like Sears and Sports Authority, while usually safe bets like Walmart closed more than 250 stores around the world in recent years, including 154 in the United States.
“One has to look no further than today’s retail industry to see the destruction that online vendors such as Amazon have done to brick-and-mortar retailers like as Sears and Macy’s,” says Doniger.
Government Regulations Challenge the Company Business Model
Cigarette sales have been challenged for years by statewide smoking bans in enclosed public spaces. That, combined with increased health and fitness awareness, and stores — like CVS — pulling cigarettes from shelves altogether, present Big Tobacco with more than a few hurdles. Similarly, taxes on sugary drinks present problems for soft-drink makers, like Coke and Pepsi. If a proposed regulation may affect your stock, then sell it before it’s enacted. Fortunately, you should have plenty of lead-time since these types of regulations have to jump through more than a few hoops before they’re finally enacted.
Photo Credit: Arch_Sam
All great points, especially key people leaving the company.
Warren Buffett is the ultimate buy and hold investor, and it’s worked well for him. Most people don’t have the insight or access to information to pick stocks as well as Buffett, or if they do, lack the will to execute. And Berkshire definitely won’t be the same after he leaves. Of course, the right time to sell is the microsecond before he leaves, which then becomes a market timing puzzle.
Yeah, if we could time the market, we’d all be rich, Jack.
Good comments!
These are all fine ideas for investors holding stock of individual companies. How about investors holding stock through mutual funds, index funds, or stock ETFs?