You already know that frictional expenses can make buying and selling stock in rapid-trading fashion seriously lower your returns (for more information read Frictional Expenses: The Hidden Investment Tax ). Still, there are times when you may want to part with one of your stock positions. How do you know when its time to say goodbye to a favorite stock? These helpful tips can make the call easier.
Debt is growing too rapidly. (For more information, see The Debt to Equity Ratio .)
New competition is likely to seriously harm the firms profitability or competitive position in the market place. (For more information, see Profiting from Franchise Value: Turning Brand Name Into Investment Income ).
Managements ethics are questionable. Benjamin Graham said that, you cannot make a quantitative adjustment for unscrupulous management, only avoid it. In other words, it doesnt matter how cheap a stock is, if the executives are crooks, you are likely to get burned.
The industry as a whole is doomed due to a commoditization of the product line. (For more information, see The Perils of the Commodity Business .)
The market price of the stock has risen far faster than the underlying diluted earnings per share. Over time, this situation is not sustainable. (For more information, see The 3 Types of Investment Risk .)
You need the money in the near future a few years or less. Although stocks are a marvelous long-term investment. short-term volatility can cause you to sell out an inopportune moment, locking in losses. Instead, park your cash in a safe investment such as a bank account or a money market fund.
You dont understand the business, what it does, or how it makes money. (For more information, see Invest in What You Know .)
One important note: History has shown that it is generally not a good idea to sell because you of your expectation for macroeconomic conditions (such as the national unemployment rate or the governments budget deficit) or because you expect the stock market to decline in the short-term. Analyzing businesses and calculating their intrinsic value is relatively simple; you have no chance of accurately predicting with any consistency the buy and sell decisions of millions of other investors with different financial situations and analytical abilities.
