Is It Time to Sell?

Lighten up ... rotate out ... take a little off the table.

Whatever you call it, it means "selling." And selling is tricky business. So before you pull the rip cord, ask yourself this:

"What if I had never sold a stock?"
Would you have more money now, or less? I set out to answer that question this morning, but I chickened out.

I already knew the answer. If I had never sold a single share of stock, I would be ... richer than I am today. How much richer? Much richer. I can't give you a precise figure, because I knew that once I saw it for myself, I would scream.

It gets worse and worse and worse
I bought eBay (Nasdaq: EBAY) on a tip back in 1998. I dumped it a month later for a quick double. OK, that's not exactly true. In fact, it's a complete lie. But I could have, and it does illustrate my point.

"I sold eBay back in 1998" is one of the most sickening things you'll ever want to admit to another investor. After all, since that first double, eBay is up another 1,000%. I didn't flip Amazon.com (Nasdaq: AMZN) for a quick double, either.

But somebody did, and I know how that somebody feels. Ever hear of an oil and gas exploration outfit called XTO Energy (NYSE: XTO)? It pains me to admit that XTO is just one of a handful of energy stocks I scalped for a quick profit in the late '90s -- it's up about 30 times in value since.

"So what did you do with the cash?"
How should I know? I probably bought another stock, but do you think it did as well as XTO? Fat chance. I know I didn't have a better stock in mind when I dumped it. I don't recall buying a house or furniture, either. (You'll see how this is relevant before we're done, believe it or not.)

No, I sold my meal ticket to lock in a profit. But what did I really "lock in"? Zip. You never do, unless you pull your profits straight out of the market, which is not something I think you should consider now, especially if you're in your prime investing years like I am.

That's right. Tempting as it is, I don't think you should try to outwit this market. A lot of folks call themselves "market timers" -- and a few actually seem to pull it off -- but not me. In fact, you might want to brace yourself, because I'm going to go one giant step further than that.

I barely believe in valuation
At least, not when it comes to selling. Sometimes a stock gets so cheap you have to buy it. This guy I know (an unruly chap with a British accent I call "Admiral") went gaga over Home Depot (NYSE: HD) when investors abandoned ship in January 2003 (good company, great price).

Need a more current example? How about Coca-Cola (NYSE: KO)? Despite a great brand and solid sales and earnings growth, the stock treaded water for years -- before the value guys moved in, me included. It's up some 50% in 18 months. I'm expecting the same out of Anheuser-Busch (NYSE: BUD), which I also own.

But the "value" math gets dicey when it comes to selling -- especially with growth stocks, and especially winners. The fact is, I've met some great stock pickers in my day, but very few great sellers. Come to think of it, I've never met a great seller.

Promise me you won't get too cute
That's why I'm not surprised that my colleague Bill Mann and the team at Motley Fool Hidden Gems (more about these guys just ahead) have led me to more than a dozen stocks that doubled over the past four years, including a 500% gainer.

They work hard and stick to the fundamentals. Plus, they're fishing a rich pond. Wall Street isn't snooping around most of these stocks yet, which creates inefficiencies and pent-up demand.

But just so you don't write me off as some kind of cheerleader, I'll let you in on a secret: I use the Hidden Gems service to lead me to undervalued small caps with big potential. From time to time, the team tells us to sell, but I don't listen -- and I probably won't in the future. Especially not if it's a winner. I never sell on valuation.

That's how tragedies happen
After all, market-timers tell you that buy-and-holders like us get wiped out in bad markets. But then you pull up chart after chart of "boring" old stalwarts -- forget my little XTO; check out massive Chevron (NYSE: CVX) -- and what do you see? A slope skyward. So how on Earth did anybody ever lose money on stocks like that? Good question.

Know what else looks like that? The Dow or the S&P 500 -- a.k.a. the market. Granted, when you zoom in, the ride gets bumpier, but the long-term trend is higher. So tell me, how do you lose money in the market? Well, you either buy at the top in 2000 -- and only at the top in 2000 -- or you get cute and buy and sell along the way.

Consider this instead: Sell your stocks when you want to buy a house, furniture, or make another major purchase. Sell when you have too much in stocks and you want to buy some bonds or gold, or add to your Dickensian Village collection. Sell when you have too much in any one stock. But sell a stock, or a dicey market like this one, on valuation alone, at your own peril.

You don't have to go it alone
OK. Enough preaching. Like I said, when you join forces with a stock picker like Bill Mann at Hidden Gems, smarter investors than I will tell you when to lock in your gains. But remember, the choice is yours.

And when the Hidden Gems guys tell you to buy, you'll want to listen. After all, as of today, their recommendations are up 29% on average. That's compared with just 7% if you'd bought the S&P 500 instead. Are you earning returns like that?