Is It Time to Sell?

Think about this for a moment: What if you'd never sold a stock?

Would you have more money now, or less? I set out to answer that question myself this morning, and to back it up with some hard data. I chickened out.

I 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 couldn't bear to run the numbers.

It gets worse and worse
I bought Yahoo! (Nasdaq: YHOO) on a tip back in January 1997. I dumped it a few months later for a quick double. OK, that's not exactly true. In fact, it's a lie. But I could have, and it illustrates my point.

"I sold Yahoo! back in 1997" is one of the most sickening things you'll ever have to admit to another investor. After all, since that first double, Yahoo! has doubled again ... many, many times.

I didn't flip the Google (Nasdaq: GOOG) IPO for a quick double, either. But I know a little how that feels. Pull up a long-term chart for medical-waste handler Stericycle (Nasdaq: SRCL). You'll see a steady ramp upward, connecting $2 to ... the top of the freakin' world. (OK, only to around $60, but still.)

You guessed it. I bought Stericycle for a few bucks in 1997 and sold it for around $10 a couple of years later. Now, it's somewhere in the mid-$50s. That's what I call the most painful double of my career.

"So what did you do with the cash?"
I probably bought another stock, but do you think it did as well as Stericycle? 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 even furniture, either. (You'll see how this is relevant in a moment, believe it or not.)

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

That's right. Tempting as it is, I don't think you should try to time this market. A lot of folks claim to do it -- and a few actually seem to pull it off for a time -- 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. Here at the Fool, folks got downright giddy when Apple (Nasdaq: AAPL) and later Corning (NYSE: GLW) hung around the single digits in early 2003. Nice call.

More recently, the value guys have been poking around the builders and financials. Eddie Lampert, the guy some are calling the next Warren Buffett, recently took a stake in Centex (NYSE: CTX) and upped his position in student loan company SLM (NYSE: SLM). We'll see how that works out for him, but I think he's on to something.

Either way, valuation is well and good if you've got money to put to work, but the math gets dicey when it comes to selling -- especially growth stocks, and especially big winners. The fact is, I've met some great stock pickers in my day, but not many great sellers. Come to think of it, I've never met a great seller.

Promise me you won't get too cute
Let me put it another way. I'm not surprised that my pal Tom Gardner's crew at Motley Fool Hidden Gems has uncovered more than a dozen stocks that doubled over the past few years.

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

But just so you don't write me off as a Hidden Gems cheerleader, I'll let you in on a secret: I use the service to lead me to undervalued small caps with big potential. When they tell us to sell, I typically 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
So-called market-timers tell you that buy-and-holders like us get wiped out in bad markets. Yet, when you pull up chart after chart of "boring" widow and orphan stocks, what do you see? A gentle 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, for that matter -- a.k.a. the market. Granted, when you zoom in, the ride looks bumpier, but the trend is up. So 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 approach instead: Sell your winners when you want to buy a house, furniture, or other major purchase. Sell when you have too much in stocks and you want to buy some bonds, gold bars, or Dickensian village collectibles. Sell when you have too much in any one stock. But sell a stock on valuation alone at your own peril.

You don't have to go it alone
OK. Enough preaching. Like I said, when you join a stock-picking service like Hidden Gems, smarter investors than I will tell you when to sell your big winners and lock in your gains. But the choice is always yours.

And when these guys tell you to buy, you'll want to listen. As of this morning, their recommendations are up 33.9% on average. That's compared with a downright decent 10.4% if you'd simply bought the S&P 500 instead. Is your money growing that fast?

 Copyright © 2008 Universal Press Syndicate.